* Canadian dollar at C$1.2542, or 79.73 U.S. cents
* Loonie touches its weakest since Aug. 31 at C$1.2546
* Canada's trade deficit widens in August to C$3.41 billion
* Bond prices higher across the yield curve
By Fergal Smith
TORONTO, Oct 5 (Reuters) - The Canadian dollar weakened to a five-week low against its U.S. counterpart on Thursday after domestic data showing a drop in exports for the third straight month further weakened prospects of another interest rate hike this year from the Bank of Canada.
Canada's trade deficit widened in August to C$3.41 billion from a revised C$2.98 billion shortfall in July, as exports fell for a third consecutive month, Statistics Canada said.
"This is another disappointing trade report," said Ryan Brecht, a senior economist at Action Economics.
It suggests the Bank of Canada will not change rates this month and reduces the chances of a rate hike in December, Brecht said.
The central bank has raised rates twice since July. But the chances of another hike this year dropped to 60 percent from 66 percent before the data, the overnight index swaps market indicated. They were nearly 100 percent before Governor Stephen Poloz signaled last week that a third hike was not imminent. BOCWATCH
At 9:19 a.m. ET (1319 GMT), the Canadian dollar CAD=D4 was trading at C$1.2542 to the greenback, or 79.73 U.S. cents, down 0.5 percent.
The currency's strongest level of the session was C$1.2463, while it touched its weakest since Aug. 31 at C$1.2546.
The price of oil, one of Canada's major exports, steadied on expectations that Saudi Arabia and Russia would extend production cuts. crude CLc1 prices were up 0.24 percent at $50.10 a barrel.
Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 2.5 Canadian cents to yield 1.52 percent and the 10-year CA10YT=RR rising 15 Canadian cents to yield 2.103 percent.
The gap between Canada's two-year yield and its U.S. equivalent narrowed by 1.4 basis points to a spread of 3.7 basis points.
Canada's September employment report is due on Friday.