* Canadian dollar strengthens 0.4% against the greenback * Price of U.S. oil increases 0.9% * Canadian factory sales fall 1.5% in July * Canadian 10-year yield rises 1.1 basis points to 1.232% TORONTO, Sept 14 (Reuters) - The Canadian dollar on Tuesday strengthened against its U.S. counterpart for a second day as oil prices rose and data showing softer U.S. inflation weighed on the greenback. The price of oil, one of Canada"s major exports, hit a six-week high as Hurricane Nicholas weakened into a tropical storm, bringing the threat of widespread floods and power outages to Texas and Louisiana, and as the International Energy Agency forecast a big demand rebound for the rest of the year. U.S. crude prices were up 0.9% at $71.05 a barrel, while the U.S. dollar fell against a basket of major currencies after data showed underlying U.S. consumer prices increased at their slowest pace in six months in August, suggesting that inflation had probably peaked. Investors have been concerned that a sustained rise in inflation could push the Fed into tightening policy earlier than signaled. The Canadian dollar was trading 0.4% higher at 1.2602 to the greenback, or 79.35 U.S. cents, adding to its gains on Monday. It traded in a range of 1.2600 to 1.2664. In domestic data, factory sales decreased by 1.5% in July from June, data from Statistics Canada showed. That was a bigger decline than analysts expected but the previous month was revised higher to show a 3.6% gain. Canada"s inflation report for August is due on Wednesday and could offer clues on the Bank of Canada policy outlook. Canadian government bond yields edged higher across much of a steeper curve, with the 10-year up 1.1 basis points at 1.232%. (Reporting by Fergal Smith, Editing by Nick Zieminski)