(Updates prices) * Canadian dollar falls 0.6 percent against the greenback * Loonie touches a two-month low at 1.3457 * Price of U.S. oil falls 0.6 percent * Bond prices rally across the yield curve By Fergal Smith TORONTO, March 6 (Reuters) - The Canadian dollar weakened to a two-month low against its U.S. counterpart on Wednesday after a more dovish tone from the Bank of Canada drove the gap between Canadian and U.S. yields to the widest in more than a decade. The gap between Canada's two-year yield and its U.S. equivalent began to move wider on Friday after data showing that Canada's economy barely expanded in the fourth quarter. On Wednesday, the spread widened by 2.5 basis points to about 84 basis points in favor of the U.S. bond, its widest since February 2007. "Today, more dovish-than-expected commentary has been triggering the market again ... the FX side has caught up with that rate spread," said Amo Sahota, director at Klarity FX in San Francisco. Faced with a slowing global and domestic economy, the Bank of Canada held interest rates steady as expected and said there was "increased uncertainty" about the timing of future rate increases. At 4:18 p.m. (2118 GMT), the Canadian dollar was trading 0.6 percent lower at 1.3432 to the greenback, or 74.45 U.S. cents. The currency touched its weakest intraday level since Jan. 4 at 1.3457. The decline for the loonie came as data showed that Canada racked up a record trade deficit in December and that the pace of purchasing activity slowed in February to its weakest in five months. Also, U.S. crude oil futures settled down 0.6 percent at $56.22 a barrel after U.S. government data showed a sharp build in crude inventories. Oil is one of Canada's major exports. A former key aide to Prime Minister Justin Trudeau, who is at the center of a major political crisis, denied on Wednesday he had pressured the then-justice minister to allow a major company to avoid a corruption trial last year. "It is another election year and politics will be important. ... I think it has the potential to weigh on sentiment a little bit for international traders," Sahota said. Still, currency strategists expect the Canadian dollar to strengthen over the coming year, helped by rising investor appetite for risk. Canadian government bond prices were higher across the yield curve, with the 10-year rising 50.4 Canadian cents to yield 1.820 percent. The 10-year yield touched its lowest intraday since June 2017 at 1.790 percent. Canada's employment report for February is due on Friday. (Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter Cooney)
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