* Canadian dollar touches a four-week high at 1.4011

* Canada-US 2-year spread narrows to 132 basis points

* Housing starts fall 6% in June

* Bond yields move higher across the curve

By Fergal Smith

TORONTO, July 16 (Reuters) - The Canadian dollar edged lower

against its U.S. counterpart on Thursday, but held near an

earlier four-week high as cooler U.S. inflation data this week

narrowed the gap between U.S. and Canadian bond yields.

The loonie was trading 0.1% lower at 1.4050 per U.S.

dollar, or 71.17 U.S. cents, after touching its strongest

intraday level since June 17 at 1.4011.

* The gap between Canada's 2-year yield and its U.S.

equivalent has narrowed to 132 basis points in favor of the U.S.

note from 142 basis points last month.

* The narrower spread has helped support the loonie against

the U.S. dollar, said Amo Sahota, director at Klarity FX in San

Francisco.

* "That's been led by the softer inflation readings in the

U.S. paring back Fed tightening expectations this year," Sahota

said.

* The swap market has priced in one Federal Reserve rate

hike by December, down from the two it was leaning toward in

June.

* The Bank of Canada on Wednesday left its benchmark

overnight rate unchanged at 2.25% as widely expected and said

growth would strengthen in the second half of the year as

inflation pressures eased.

* One major driver of inflation, and one of Canada's major

exports, is oil. The U.S. price fell 0.4% to $79.30 a barrel but

held near its highest level in a month on rising tensions in the

Middle East.

* In domestic data, housing starts fell 6% in June ‌to

238,971 units on a seasonally adjusted ​annualized basis,

falling short of the 257,900 that economists had projected.

* U.S. Trade Representative Jamieson Greer said on Wednesday

that formal trade talks with Mexico were progressing, while

discussions with Canada had yet to produce concessions sought by

President Donald Trump.

* Canadian government bond yields moved higher across the

curve. The 10-year was up 2.1 basis points at 3.552%

but remained below the near two-month high of 3.596% it touched

during Wednesday's session.