* Canadian dollar at C$1.2413, or 80.56 U.S. cents
* Touches its weakest level since Sept. 1 at C$1.2433
* Canada-U.S. 2-year spread narrows by 5.9 basis points
By Fergal Smith
TORONTO, Sept 27 (Reuters) - The Canadian dollar weakened to near a four-week low on Wednesday against its broadly stronger U.S. counterpart while short-term bond yields fell after Bank of Canada Governor Stephen Poloz struck a cautious note about the economy.
Poloz, in prepared remarks for a speech on Canada's economy, said the central bank will closely watch movements in longer-term interest rates and the exchange rate as it considers how to follow its two recent rate hikes. mention of the currency is the "big takeaway," said Eric Theoret, currency strategist at Scotiabank.
The loonie has rallied more than 8 percent this year. A further rapid appreciation of the loonie could put the brakes on the country's economy just as it is gaining momentum. of a another Canadian rate hike this year fell to 83 percent from almost 100 percent before the release of Poloz's remarks, overnight index swaps data showed. BOCWATCH
The central bank governor will hold a press conference at 12:55 p.m. ET (1655 GMT).
At 12:26 p.m. ET (1626 GMT), the Canadian dollar CAD=D4 was trading at C$1.2413 to the greenback, or 80.56 U.S. cents, down 0.5 percent.
The currency's strongest level of the session was C$1.2336, while it touched its weakest since Sept. 1 at C$1.2433.
The U.S. dollar .DXY rose to more than a one-month high against a basket of currencies, as optimism about U.S. fiscal reforms boosted sentiment in favor of the greenback. of oil, one of Canada's major exports, edged higher, helped by an unexpected drop in U.S. crude inventories. U.S. crude CLc1 prices were up 0.37 percent at $52.07 a barrel. crude CLc1 prices were up 0.37 percent at $52.07 a barrel.
Canadian government bond prices were mixed across the yield curve, with the two-year CA2YT=RR price up 7 Canadian cents to yield 1.569 percent and the 10-year CA10YT=RR falling 8 Canadian cents to yield 2.123 percent.
The gap between Canada's 2-year yield and its U.S. equivalent narrowed by 5.9 basis points to a spread of 9.4 basis points.