* Canadian dollar at C$1.2686, or 78.82 U.S. cents
* Oil prices fall 0.2 percent
* Bond prices lower across steeper yield curve
* Canada-U.S. 10-year spread hits widest since June 27
By Fergal Smith
TORONTO, Feb 21 (Reuters) - The Canadian dollar weakened to an eight-week low against its U.S. counterpart on Wednesday as oil prices fell and investors weighed minutes from the U.S. Federal Reserve's January policy-setting meeting.
At 4 p.m. (2100 GMT), the Canadian dollar CAD=D4 was trading 0.3 percent lower at C$1.2686 to the greenback, or 78.82 U.S. cents.
The currency's strongest level of the session was C$1.2626, while it touched its weakest since Dec. 26 at C$1.2702.
"The market is trying to get its head around how many (Fed rate) hikes are to come," said Don Mikolich, executive director, foreign exchange sales at CIBC Capital Markets.
Investors worry that inflation could rise if the Fed proceeds too slowly with rate hikes, Mikolich said.
The U.S. dollar .DXY rose against a basket of major currencies after the Fed's rate-setting committee at its last policy meeting showed more confidence in the need to keep raising interest rates, with most policymakers believing that inflation would perk up. USD/ price of oil, one of Canada's major exports, fell ahead of data expected to show rising crude inventories in the United States. O/R
U.S. crude CLc1 prices settled 0.2 percent lower at $61.68 a barrel.
Losses for the loonie came after recent data showed a drop in December manufacturing shipments and wholesale trade, which could dent prospects for monthly gross domestic product.
Canada's retail sales report for December is due on Thursday and the country's January inflation report is set for Friday.
Canadian government bond prices were lower across a steeper yield curve, with the two-year CA2YT=RR down 2.5 Canadian cents to yield 1.84 percent and the 10-year CA10YT=RR falling 16 Canadian cents to yield 2.345 percent.
The gap between Canada's 10-year yield and its U.S. equivalent widened by 2.9 basis points to a spread of -56.9 after earlier seeing its widest spread since June 27.