* Canadian dollar at C$1.2564, or 79.59 U.S. cents
* Loonie touches its weakest since July 21 at C$1.2589
* Bond prices slightly higher across the yield curve
TORONTO, Aug 2 (Reuters) - The Canadian dollar weakened on Wednesday to a nearly two-week low against its U.S. counterpart as the gap between U.S. and Canadian yields widened after having narrowed sharply in recent months.
Canada's two-year yield fell 1.8 basis points further below its U.S. counterpart to a spread of -9.9 basis points.
The spread last week hit its narrowest since May 2015 at -2.4 basis points, after the Bank of Canada raised interest rates earlier in July for the first time in nearly seven years.
Losses for the loonie and other commodity-linked currencies, such as the Australian and New Zealand dollars, came as a senior administration official said U.S. President Donald Trump is close to a decision on how to respond to what he considers China's unfair trade practices. currencies could be hurt by the threat of protectionist policies.
At 9:05 a.m. ET (1305 GMT), the Canadian dollar CAD=D4 was trading at C$1.2564 to the greenback, or 79.59 U.S. cents, down 0.2 percent.
The currency's strongest level of the session was C$1.2533, while it touched its weakest since July 21 at C$1.2589.
Still, the loonie has rallied nearly 10 percent since early May. It touched on Thursday its strongest in more than two years at C$1.2414.
Oil, one of Canada's major exports, shook off bearish headlines as investors and traders took advantage of earlier losses and pushed crude prices back towards this week's eight-week highs. crude CLc1 prices were up 0.16 percent at $49.24 a barrel.
Canadian auto sales rose 4.9 percent in July as the industry benefited from strong economic growth even as U.S. sales fell for a fifth consecutive month, according to data released on Tuesday. government bond prices were slightly higher across the yield curve, with the two-year CA2YT=RR up 0.5 Canadian cent to yield 1.260 percent and the 10-year CA10YT=RR rising 7 Canadian cents to yield 1.950 percent.
Both Canadian and U.S. jobs data for July and domestic trade data for June are due on Friday. ECONCA