* C$ closes below 79 U.S. cents as equities tumble
* Canada's current account swings to deficit in Q4
* Bond prices rally as weak data sparks interest (Adds comments and closing numbers)
By Frank Pingue
TORONTO, Feb 27 (Reuters) - Canada's currency fell sharply on Friday, touching its weakest level in over a month, hurt by safe-haven flows to the greenback and data that showed the country's first current account deficit in nearly a decade.
A fall in the price of oil, a key Canadian export, after a three-day bull run also contributed to knocking the Canadian dollar to its third straight weekly decline.
But domestic data that showed current account plunged into deficit in the fourth quarter took the bulk of the blame for the currency's latest selloff versus the U.S. dollar.
"The size of the current account deficit as well as the revision to the previous quarter drove home the implications of the weaker commodity prices we have seen," said Mark Chandler, fixed income strategist at RBC Capital Markets. "That and the flight to the U.S. dollar were the primary factors behind the Canadian dollar's fall."
Canada's current account deficit for the fourth quarter of C$7.49 billion was wider than the C$4.85 billion deficit forecast by analysts. [ID:nN27334437]
The Canadian dollar closed at C$1.2723 to the U.S. dollar, or 78.60 U.S. cents, down from C$1.2532 to the U.S. dollar, or 79.80 U.S. cents, at Thursday's close.
For the week, the domestic currency fell 1.8 percent.
At one point Canada's currency dropped as low as C$1.2745 to the U.S. dollar, or 78.46 U.S. cents, its lowest level since Jan. 21.
Weak equities overnight had taken a toll on the Canadian dollar as investors still concerned with the global banking system flocked to the greenback given its safe-haven status.
That sentiment carried over into the North American session to rattle equities in Canada and the United States and left the Canadian dollar little chance of staging a rebound as traders shunned commodity-linked currencies.
BONDS PRICES RALLY
Canadian bond prices ended higher across the curve as grim economic data and news that the U.S. government was taking a large common equity stake in embattled lender Citigroup (C.N: Quote, Profile, Research, Stock Buzz) sparked safety bids.
The Citigroup news sowed more uncertainty over the fate of major U.S. banks and triggered a surge in investor demand for more secure assets such as government debt.
Also supporting bonds was the continuation of weak North American economic data as the domestic current account report came alongside U.S. data that showed the economy there shrank more than expected in the fourth quarter.
That all helped to send Toronto's key stock index to a drop of 0.78 percent, while the Dow Jones industrial average fell 1.66 percent.
"Equities were an influence in terms of the strength of both the Canadian and U.S. bond markets ... and there is still broadly no sense at all that there is a great appetite for risk," said Chandler. "And maybe there is some anticipation on the Bank of Canada."
The Bank of Canada is scheduled to make its next interest rate announcement on March 3 and a Reuters poll conducted on Thursday showed most primary securities dealers expect the bank to cut its key interest rate next week. [ID:nTOR004250]
The next Canadian data will be the closely watched gross domestic product figures on Monday, which are expected to show the economy shrank in the fourth quarter of 2008.
The interest-rate sensitive two-year bond rose 11 Canadian cents to C$102.75 to yield 1.156 percent, while the 10-year bond rose 15 Canadian cent to C$105.36 to yield 3.133 percent.
The 30-year bond ended up 5 Canadian cents at C$122.55 to yield 3.705.
Canadian bonds outperformed U.S. Treasuries across most of the curve. The Canadian 30-year bond yield moved to 1.20 basis points below its U.S. counterpart. On Thursday, it ended 2.90 basis points above. (Editing by Jeffrey Hodgson)