* Canadian dollar at C$1.3056, or 76.59 U.S. cents
* Loonie touches its strongest since June 14 at C$1.2963
* Bond prices lower across flatter yield curve
* 2-year yield reaches its highest in nearly 10 years
By Fergal Smith
TORONTO, Aug 7 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday, with the currency pulling back from a nearly eight-week high intraday as a diplomatic dispute worsened between Canada and Saudi Arabia.
Losses for the loonie came as Canadian asset markets reopened following a civic holiday on Monday and as the U.S. dollar pared some of its earlier losses against a basket of major currencies. reversed course (on the Canadian dollar) when the U.S. dollar index found a bottom," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.
Traders revealed the Saudi government, which has denounced Canada for urging the release of rights activists, would no longer buy Canadian wheat and barley. the bilateral trade relationship between the two countries, which is worth less than $4 billion a year, may be too modest to damage the Canadian dollar.
"I really think it has got to be (currency) flows," said Adam Button, currency analyst at ForexLive. "In the bigger picture, nothing (fundamental) has changed for the Canadian dollar."
The loonie had benefited over recent days from data showing stronger-than-expected growth in Canada's economy in May and a record high for the country's exports in June.
At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading 0.4 percent lower at C$1.3056 to the greenback, or 76.59 U.S. cents.
The currency's weakest level of the session was C$1.3076, while it touched its strongest since June 14 at C$1.2963.
The price of oil, one of Canada's major exports, was boosted by revived U.S. sanctions against major crude exporter Iran that could tighten global supply. U.S. crude oil futures CLc1 settled 0.2 percent higher at $69.17 a barrel. of purchasing activity in Canada slowed in July as employment rose at a more moderate pace, according to Ivey Purchasing Managers Index data. jobs data for July is due on Friday.
Canadian government bond prices were lower across a flatter yield curve. The two-year CA2YT=RR fell 6 Canadian cents to yield 2.129 percent, its highest since October 2008, and the 10-year CA10YT=RR declined 18 Canadian cents to yield 2.374 percent.