* C$ ends at 96.26 U.S. cents
* Weak U.S. data raises concerns about recovery
* Bonds gain in risk aversion play (Updates to close, adds quote)
By Jennifer Kwan
TORONTO, July 15 (Reuters) - The Canadian dollar touched its lowest level in nearly a week against the greenback on Thursday, hit by U.S. data that fueled worries about the economic health of Canada's biggest trading partner.
Investor sentiment soured after a gauge of factory activity in New York state fell sharply and a third monthly drop in wholesale prices in June fueled worries about deflation. [ID:nEAH104F00] [ID:nN15196157]
The currency fell to C$1.0443 to the U.S. dollar, its lowest level since July 9, as the U.S. data sparked a broader selloff in riskier assets, sending U.S. Treasury bonds higher and weighing on global equities -- though Toronto's main stock index .GSPTSE ended 1 percent higher thanks to a late rally [.TO].
"(It's) worries over what's happening with the U.S. in terms of weak data, a weak equity market. I guess the question is, is that going to have an effect on Canada and slow down the Canadian economy," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"That's really the biggest fear right now."
The Canadian dollar CAD=D4 ended at C$1.0388 to the U.S. dollar, or 96.26 U.S. cents, down from Wednesday's close at C$1.0341 to the U.S. dollar, or 96.70 U.S. cents.
The U.S. dollar fell broadly on Thursday, and the euro soared as soft inflation and manufacturing data added to concerns about the strength of the U.S. economy. [FRX/]
"The market is starting to change its tone now. The darkest fears about Europe are starting to dissipate and attention is turning over to the U.S.," said Butler.
There is a reversion back to "more longer-term fundamentals and based on the weakening sentiment with respect to U.S. economics," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"Money is flying out of the States and back into euro, away from commodities and away from commodity-related currencies."
The weak U.S. data added to jitters fueled by data from China that showed a slowdown in its economy. [MKTS/GLOB]
It also comes a day after minutes from a U.S. Federal Reserve meeting showed policymakers felt they should stand ready to do more to boost the economy if the outlook worsens.
The soft data also weighed on commodity prices, notably the price of oil, which fell below $77 a barrel. Canada is the No. 1 exporter of oil to the United States. [O/R]
Scotia's Butler said key technical levels include C$1.0411 to the U.S. dollar, or the 55-day moving average, and C$1.0412, which is the 200-day moving average.
"A lot of technicians will look at when those moving averages cross. If Canada continues to weaken off they'll likely cross and that will turn people from bullish (on the Canadian dollar) to bearish," said Butler.
Canadian government bond prices followed their U.S. counterparts higher on Thursday as the weak U.S. data guided investors to the relatively safety of government debt. [US/]
"The market still has that underlying fear that a weaker U.S. economy is going to be tough for the Canadian economy. It's not 100 percent correlated, but the market has got that in the back of their mind. It's a bit of a worry," said Butler.
The next key Canadian-driven event for the market will be the Bank of Canada's interest rate announcement on July 20, and market expectations are leaning toward a rate increase. BOCWATCH
Canadian primary dealers and global forecasters surveyed by Reuters expect the bank will raise its key overnight interest rate next week by 25 basis points to 0.75 percent, though the pace of subsequent hikes is less clear. [CA/POLL]
The two-year bond CA2YT=RR was up 12 Canadian cents to yield 1.654 percent, while the 10-year bond CA10YT=RR added 25 Canadian cents to yield 3.773 percent.
Canadian bonds notched a mix performance versus U.S. issues. The two-year bond underperformed, with the yield CA2YT=RR 104 basis points above its U.S. counterpart, compared with about 110 basis points in the previous session. (Additional reporting by Ka Yan Ng; editing by Rob Wilson)