* Canadian dollar falls 0.3% against the greenback

* Touches its weakest since January 20 at 1.3857

* Price of oil settles 4.6% higher

* Bond yields rise across the curve

By Fergal Smith

TORONTO, March 26 (Reuters) - The Canadian dollar

weakened to a two-month low against its U.S. counterpart on

Thursday as fading optimism for an early end to the Middle East

war weighed on risk-sensitive currencies.

The loonie was trading 0.3% lower at 1.3850 per U.S.

dollar, or 72.20 U.S. cents, marking the fourth straight day of

declines. The commodity-linked currency touched its weakest

intraday level since January 20 at 1.3857.

"High-beta FX is weaker as traders prepare for a likely

extension in the Iran war and what that means for policymakers,"

said Amo Sahota, director at Klarity FX in San Francisco. "It

demonstrates fading confidence in the U.S. jawboning empty peace

deals."

A U.S. proposal for ending nearly four weeks of fighting is

"one-sided and unfair," a senior Iranian official told Reuters.

High-beta FX includes currencies considered more sensitive

than average to market moves. Other commodity-linked currencies,

including the Australian dollar and the New Zealand

dollar, posted steeper declines.

The U.S. dollar benefited from safe-haven demand to notch

gains against a basket of major currencies, while the price of

oil settled 4.6% higher at $94.48 a barrel. Oil is one of

Canada's major exports.

Investors have worried that a prolonged Middle East conflict

could continue to disrupt energy supplies and fuel inflation.

Last Wednesday, the Bank of Canada said it was too early to

assess the effect of the war.

Carolyn Rogers, the central bank's senior deputy governor, on

Thursday said the central bank would have "a tough job" tackling

the structural changes, including increased U.S. trade

protectionism, that were set to permanently alter the country's

economic landscape.

Canadian bond yields moved higher across the curve, tracking

moves in U.S. Treasuries. The 10-year was up 8.4

basis points at 3.570%.