CANADA FX DEBT-C$ hits eight-week low as investors weigh Fed minutes

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    * Canadian dollar at C$1.2686, or 78.82 U.S. cents
    * Oil prices fall 0.2 percent
    * Bond prices lower across steeper yield curve
    * Canada-U.S. 10-year spread hits widest since June 27

    By Fergal Smith
    TORONTO, Feb 21 (Reuters) - The Canadian dollar weakened to
an eight-week low against its U.S. counterpart on Wednesday as
oil prices fell and investors weighed minutes from the U.S.
Federal Reserve's January policy-setting meeting.
    At 4 p.m. (2100 GMT), the Canadian dollar          was
trading 0.3 percent lower at C$1.2686 to the greenback, or 78.82
U.S. cents.
    The currency's strongest level of the session was C$1.2626,
while it touched its weakest since Dec. 26 at C$1.2702.
    "The market is trying to get its head around how many (Fed
rate) hikes are to come," said Don Mikolich, executive director,
foreign exchange sales at CIBC Capital Markets.
    Investors worry that inflation could rise if the Fed
proceeds too slowly with rate hikes, Mikolich said.
    The U.S. dollar        rose against a basket of major
currencies after the Fed's rate-setting committee at its last
policy meeting showed more confidence in the need to keep
raising interest rates, with most policymakers believing that
inflation would perk up.                    
    The price of oil, one of Canada's major exports, fell ahead
of data expected to show rising crude inventories in the United
    U.S. crude        prices settled 0.2 percent lower at $61.68
a barrel.
    Losses for the loonie came after recent data showed a drop
in December manufacturing shipments and wholesale trade, which
could dent prospects for monthly gross domestic product.
    Canada's retail sales report for December is due on Thursday
and the country's January inflation report is set for Friday.
    Canadian government bond prices were lower across a steeper
yield curve, with the two-year            down 2.5 Canadian
cents to yield 1.84 percent and the 10-year             falling
16 Canadian cents to yield 2.345 percent.
    The gap between Canada's 10-year yield and its U.S.
equivalent widened by 2.9 basis points to a spread of -56.9
after earlier seeing its widest spread since June 27.

 (Reporting by Fergal Smith; Editing by Peter Cooney)