* C$ at 0.9877 vs US$, or $1.0125 * C$ lowest since May 1 against euro * IMF says C$ is 5 to 10 pct overvalued * Bond prices mixed By Solarina Ho and Claire Sibonney TORONTO, Dec 19 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Wednesday as comments earlier this week from Australia's central bank about the commodities sector peaking kept commodity-linked currencies under pressure. The Reserve Bank of Australia said it decided to cut interest rates this month rather than wait because it saw further evidence that the peak in the mining investment boom was near, while the non-resource sector showed no signs of picking up. "Aussie and Kiwi are well off on that and I think the Canadian dollar is weighing a little lower on that as well," said Mark Frey, chief market strategist at Cambridge Mercantile Group, in Victoria, British Columbia. Frey also noted a widening spread between Brent and West Texas Intermediate crude. "Not only is the overall trend negative but the spread is becoming increasingly negative as well. That, with sort of a global sentiment that the commodity sector might be peaking, is definitely not good news for the Canadian dollar." At 3:45 p.m. (2045 GMT), the Canadian dollar traded at C$0.9877 versus the U.S. dollar, or $1.0125, weaker than Tuesday's North American finish of C$0.9857, or $1.0145. Investors also looked to book profits ahead of the holidays following a recent rally to two-month highs, while optimism over a resolution to the U.S. budget crisis also waned as progress in talks between the White House and congressional Republicans seemed to slow. "I think this is probably some profit-taking heading into the holidays, because the market was quite short USD/CAD. Definitely some technical levels have broken on some of the Canada crosses ... It's had a very decent rally," said David Bradley, director of foreign exchange trading at Scotiabank. The currency did not react to a smattering of North American data, including Canadian wholesale trade, which expanded by a stronger-than-expected 0.9 percent in October, and data that showed U.S. homebuilding permits touched their highest level in nearly 4-1/2 years in November. Bradley said the currency's strength has stalled around the C$0.9825 level against the U.S. dollar, and noted a lot of interest to sell toward C$0.9882. Canada was underperforming most major currencies except other commodity-linked currencies and the Japanese yen. It touched its weakest level against the euro since May 1 at C$1.3131, or 76.16 euro cents. A key business survey in Germany suggested that Europe's biggest economy was likely to bounce back quickly from its slowdown. The growing confidence in the outlook lifted the euro to a 16-month high against the yen and an 8-1/2 month peak versus the U.S. dollar. "It's kind of a confounding day ... we're seeing a very different reaction from the pan-European currencies that are holding up very well against the dollar today, primarily driven by at least some movement on the fiscal cliff issue," Frey said. "You would think that would create sort of a risk-on mentality, but we're really seeing a divergence today between the direction in currency markets versus everything else with the exception of that commodity-linkage for the dollar-bloc currencies." Citing a sharp widening of Canada's current account deficit , the International Monetary Fund on Wednesday said the Canadian dollar was about 5 to 15 percent overvalued, due in part to heavy flows of foreign investment. Analysts have noted that the IMF's plan to add the Canadian dollar to its list of reserve currencies may have helped to boost its appeal. Canadian government bond prices were mixed. The two-year bond was up 3 Canadian cents, yielding 1.137 percent, while the benchmark 10-year bond lost 10 Canadian cents to yield 1.851 percent.