C$ trades near 3-week low as short positions strike better balance

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Canadian dollar falls 0.1% against the greenback

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Trades in a range of 1.3566 to 1.3604

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Price of U.S. oil settles 2.5% higher

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Canadian bond yields mixed

By Fergal Smith

TORONTO, Sept 12 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Thursday as support from recent short-covering faded and investors bet the Bank of Canada would continue to cut interest rates in an effort to boost the domestic economy.

The loonie was trading 0.1% lower at 1.3590 per U.S. dollar, or 73.58 U.S. cents, after moving in a range of 1.3566 to 1.3604. On Wednesday, the currency touched its weakest intraday level since Aug. 21 at 1.3622.

"You are seeing the (Canadian) dollar start to soften a little bit and we wouldn't be shocked if that is the trend you continue to see here - some Canadian dollar underperformance against the U.S. dollar for the next number of months as the Bank of Canada continues to ease," said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.

Speculators have cut their bearish bets on the Canadian dollar to the lowest level since April, the latest data from the U.S. Commodity Futures Trading Commission showed on Friday.

A reduced short position could leave speculators less vulnerable to rallies in the currency.

"The reality is, positioning is a little bit more square and the Canadian backdrop is materially weaker than the U.S," Reitzes said.

Growth in Canada's economy is likely to fall well short of the BoC's forecast in the third quarter, economists said this week.

Analysts say that recent declines in the price of oil, one of Canada's major exports, have also weighed on the loonie.

Still, U.S. crude futures rallied on Thursday, settling 2.5% higher at $68.97 a barrel, as producers assessed the damage to output in the U.S. Gulf of Mexico after Hurricane Francine tore through offshore oil producing areas.

Canadian bond yields were mixed, with the 2-year down less than a basis point at 3.018%. (Reporting by Fergal Smith; Editing by Paul Simao)