* C$ ends at 96.51 U.S. cents
* Bond prices lower across curve
* Rising Canada rates almost inevitable-BoC's Duguay
* U.S., Canada consumer confidence falls on job worries (Updates to close)
By Claire Sibonney and Ka Yan Ng
TORONTO/OTTAWA, July 27 (Reuters) - The Canadian dollar retreated from a five-week high against its U.S. counterpart on Tuesday, pressured by U.S. consumer confidence data for July that fell to its lowest level in five months and prompted an exit from riskier assets such as commodities and equities.
Job worries drove July U.S. consumer confidence to its lowest since February, with one in six people surveyed expecting lower income in the next six months, underscoring perceptions of the precarious state of economic recovery. [ID:nN27260375] U.S. home prices rose in May but displayed no signs of a sustained rebound.
Adding to the pressure on the currency, consumer confidence in Canada faltered for a second straight month in July with optimism on jobs showing the biggest deccline. [ID:nN27103417]
Following the U.S. data and the subsequent drop in most North American equity markets and oil prices, the Canadian currency fell more than a penny to C$1.0396 to the U.S. dollar, or 96.19 U.S. cents, down from a five-week high earlier in the day at C$1.0256 or 97.50 U.S. cents.
The Canadian currency CAD=D4 finished at C$1.0362 to the U.S. dollar, or 96.51 U.S. cents, snapping a three-day streak of advances, down from Monday's finish of C$1.0324 to the U.S. dollar, or 96.86 U.S. cents.
"We have been on this risk rally for a while now," said David Watt, senior fixed income and currency strategist at RBC Capital Markets.
"The Dow Jones is now positive for the year, the euro is testing $1.30, the Aussie dollar is testing some key levels, sterling is testing some key levels, and so whenever you get to this point you get the markets wondering 'is this a trend that's supposed to continue or should things fade off'?"
Also worrying the market was the notion that stress tests on European banks were not strict enough.
"We're still trying to figure out exactly what the outcome of the European stress tests and the general risk trade," said David Tulk, senior macro strategist at TD Securities.
"It's a bit of a breather today but I think (the Canadian dollar) probably take another run at the C$1.03 level as long as the rest of the fundamentals remain in play."
Early in the day, riskier assets rose across the board after upbeat corporate earnings from both sides of the Atlantic and upbeat U.S. housing data eased recent concerns that global economic recovery is slowing.
Canadian bond prices drifted lower across the curve due to the continuing outlook for higher interest rates. Prices were unable to climb out of early declines even though sentiment turned against riskier investment instruments.
The pace of Bank of Canada rate moves remains uncertain, but it is "almost inevitable" that rates will rise over time, soon-to-retire Deputy Governor Pierre Duguay said on Tuesday, echoing the central bank's view that the path of monetary policy is not preordained. [ID:nN27103279]
Markets are pricing in around a 60 percent chance of a 25-basis-point increase in benchmark rates on Sept. 8, which would be a third straight increase in key interest rates, according to Tuesday's yields on overnight index swaps, which reflect expectations for the policy rate. BOCWATCH
The two-year bond CA2YT=RR was 7 Canadian cents lower to yield 1.630 percent, while the 10-year bond CA10YT=RR was down 32 Canadian cents to yield 3.263 percent.
Canadian bonds outperformed U.S. Treasury issues across the curve, with the Canadian 10-year bond 21.3 basis points above the comparable U.S. bond, compared with 22.9 basis points in the previous session. (Editing by Peter Galloway)