* C$ drops to lowest since July after weak wholesale data * C$ hits C$1.0138 vs US$, bond prices rise across curve By Alastair Sharp TORONTO, Feb 19 (Reuters) - The Canadian dollar fell to its lowest level since July against its U.S. counterpart on Tuesday as weak economic data and concerns about U.S. budget talks, the Canadian housing sector and energy prices weighed. Domestic wholesale trade fell more sharply than expected in December and data showed foreigners reduced holdings of Canadian securities. Looking further ahead, inflation and retail sales data due out on Friday could add to selling pressure on the loonie, as Canada's currency is colloquially known. "Weakness is on the cards for retail sales, and inflation is likely to print a little bit lower," said Joe Manimbo, a senior market analyst at Western Union Business Solutions in Washington. "These are factors that are highlighting the fragile state of Canada's recovery." The Canadian dollar fell as low as C$1.0138 versus the U.S. dollar, or 98.64 U.S. cents, its weakest point since July 26. It closed at C$1.0118, or 98.83 U.S. cents, from Friday's North American session close at C$1.0061, or 99.39 U.S. cents. Monday was a holiday in most of Canada and the United States. Camilla Sutton, chief currency strategist at Scotiabank in Toronto, said three negative factors were pushing the Canadian dollar lower in the short term, starting with U.S. budget worries that are once again on the horizon. "The threat of sequestration being triggered March 1 is weighing on the U.S. growth outlook, so that would be negative for (the Canadian dollar)," Sutton said. "The second (factor) is we seem to have a global focus on the Canadian housing sector and how that could potentially negatively impact GDP. "Thirdly, I think, (is) the ongoing focus on the energy sector in Canada, and how, even though the spread between Brent and Western Canadian Select is off its high, it's still elevated on a historical basis." While U.S. legislators temporarily averted a series of automatic spending cuts and tax hikes, the compromise on across-the-board spending cuts, known as sequestration, only postponed until March 1 a resolution to the congressional budget fight. The U.S. budget crisis typically raises fears that spending cuts and tax hikes will slow U.S. growth, which in turns hurts the economy in Canada, whose largest trading partner is the United States. Canada's slowing housing sector is also expected to weigh on economic growth as homebuilding and home buying cools from the red-hot levels of early last year. While many economists believe the sector will manage a soft landing, others fear a crash. Manimbo said C$1.01 could become a fresh support level for the greenback against the Canadian dollar, after providing stiff resistance for several weeks, if the tone of U.S. Federal Reserve minutes out on Wednesday shows less support for a large-scale bond-buying program. A top Fed official told Reuters on Tuesday that the monetary stimulus was still appropriate despite the U.S. economy's brightening prospects. Meanwhile, if sluggish Canadian data becomes the norm, investors will increasingly doubt the ability of the central bank to maintain its modestly hawkish bias. "There's no guarantee that the next move by the Bank of Canada will be a hike," Manimbo said. Canadian government bond prices fell across the curve, with the two-year bond down 1 Canadian cent to yield 1.138 percent and the benchmark 10-year bond slipping 6 Canadian cents to yield 2.024 percent. Canadian bonds largely outperformed their U.S. counterparts following the unexpectedly weak Canadian data.