CANADA FX DEBT-C$ pulls back from 8-week high as Saudi dispute escalates

 (New throughout)
    * 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.             
    "We 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.             
    Still, 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
    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          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       
settled 0.2 percent higher at $69.17 a barrel.             
    Expansion of purchasing activity in Canada slowed in July as
employment rose at a more moderate pace, according to Ivey
Purchasing Managers Index data.             
    Canada's jobs data for July is due on Friday.
    Canadian government bond prices were lower across a flatter
yield curve. The two-year            fell 6 Canadian cents to
yield 2.129 percent, its highest since October 2008, and the
10-year             declined 18 Canadian cents to yield 2.374

 (Reporting by Fergal Smith
Editing by Alistair Bell)