CANADA FX DEBT-Canadian dollar retreats from 3-week high as bond yields climb

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* Canadian dollar weakens 0.4% against the greenback * Canadian payroll employment rises by 324,800 in July * Price of U.S. oil increases 0.6% * Canadian 10-year yield touches a near four-month high TORONTO, Sept 28 (Reuters) - The Canadian dollar weakened against the greenback on Tuesday as higher U.S. bond yields offset further gains for oil prices, with the loonie pulling back its strongest level in nearly three weeks. The loonie was trading 0.4% lower at 1.2675 to the greenback, or 78.90 U.S. cents. Earlier in the session, the currency touched its strongest since Sept. 10 at 1.2593. The decline for the loonie came as the U.S. dollar climbed to its highest level in more than five weeks against a basket of major currencies. Higher U.S. Treasury yields made the greenback more attractive to investors. U.S. Treasury yields have surged since the end of last week, after the Federal Reserve said it will likely begin reducing its monthly bond purchases as soon as November and hinted that interest rate hikes may follow. The price of oil, one of Canada's major exports, rose for a sixth day on the prospect of tighter supply and firm demand but reduced factory output in China due to power shortages tempered the rally. U.S. crude prices were up 0.6% at $75.88 a barrel. Canadian payroll employment rose by 324,800 in July, led by gains in the services-producing sector in Ontario, Alberta and British Columbia, data from Statistics Canada showed. GDP data for July is due on Friday, which could offer further clues on the strength of the domestic economy. Canadian government bond yields were higher across a steeper curve, tracking the move in U.S. Treasuries. The 10-year touched its highest level since June 4 at 1.506% before dipping to 1.501%, up 4.6 basis points on the day. (Reporting by Fergal Smith, Editing by Nick Zieminski)

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