(Adds strategist quotes and details throughout, updates prices) * Canadian dollar weakens 0.5% against the greenback * Price of U.S. oil settles 0.6% lower * Producer prices in Canada fall 0.3% in August * Canadian 10-year yield rises 2.3 basis points By Fergal Smith TORONTO, Sept 29 (Reuters) - The Canadian dollar weakened on Wednesday to its lowest level in nearly a week against its U.S. counterpart as oil prices fell and the greenback posted broad-based gains. The loonie was trading 0.5% lower at 1.2749 to the greenback, or 78.44 U.S. cents, after touching its weakest level since last Thursday at 1.2774. "Month-end flows are likely playing a role in the broad dollar strength today," said Erik Nelson, a currency strategist at Wells Fargo in New York. "Risk sentiment remains shaky, which has also weighed on the Canadian dollar." The U.S. dollar surged to a 10-1/2-month peak against rival currencies, including the euro , even though a dispute in Washington over the U.S. debt ceiling threatened to plunge the government into a shutdown. Losses for the loonie "accelerated" as the euro fell to its lowest level of the year, Nelson said. The price of oil, one of Canada's major exports, was pressured by an unexpected rise in U.S. crude inventories and concerns about a slowing Chinese economy. U.S. crude oil futures settled 0.6% lower at $74.83 a barrel. Producer prices in Canada fell by 0.3% in August from July on lower prices for softwood lumber, Statistics Canada said. Still, they were up 14.3% from August last year. Canadian government bond yields rose even as traders paused their selling of U.S. Treasuries. The Canadian 10-year yield was up 2.3 basis points at 1.523%, while the gap between it and its U.S. equivalent narrowed by 1.8 basis points to a spread of 1.8 basis points in favor of the U.S. bond, its smallest since April last year. Canada's bond market will be closed on Thursday for the National Day for Truth and Reconciliation. GDP data for July is due on Friday, which could provide clues on the Bank of Canada policy outlook. (Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter Cooney)
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