CANADA FX DEBT-C$ weakens on Europe fears after Tuesday rally

* C$ at C$0.9913 vs US$, or $1.0088
    * Pares some gains after Tuesday's BoC-triggered rally
    * Markets pullback on euro zone debt fears
    * BoC's Carney warns about household debt risk
    * Bonds prices mostly higher

    By Jon Cook	
    TORONTO, April 18 (Reuters) - The Canadian dollar was
slightly lower against its U.S. counterpart on Wednesday as
worries about the sovereign debt crisis in Europe kept the
currency from extending its strong gains of the previous
    Risk sentiment took a blow as concerns about the financial
health of Spain - Europe's fourth-largest economy - flared anew,
sending the euro and other riskier currencies lower and boosting
the safe-haven appeal of the U.S. dollar. 	
    The Canadian dollar was unable to strengthen further after
the Bank of Canada's more hawkish outlook on Tuesday surprised
the market and drove the Canadian dollar to its biggest one-day
jump this year.	
    "When you reflect globally, you can see that there's cause
for a more balanced assessment so that's kept the currency range
bound," said David Tulk, chief Canada macro strategist at TD
    Spain will auction up to 2.5 billion euros ($3.29 billion)
of 2014 and 2022 bonds on Thursday. Any evidence of poor demand,
and high yields, at the auction would aggravate concerns about
Spain's fragile fiscal position. Data on Wednesday showed bad
loans at Spanish banks rose to their highest level since 1994.
    Commodity prices were also subdued, with oil and gold prices
falling and copper remaining flat.   	
    The Canadian dollar ended at C$0.9913 against the
U.S. dollar, or $1.0088, down slightly from Tuesday's North
American close at C$0.9902 against the U.S. dollar, or $1.0099. 	
    In Wednesday's Monetary Policy Report (MPR), a quarterly
report outlining the Bank of Canada's base-case projection for
Canadian inflation and growth, the bank raised its growth
forecasts for the first three quarters of 2012, but warned that
Canadian household debt levels would rise further.
    Bank Governor Mark Carney also said the euro zone debt
crisis was "still the biggest downside risk" to the Canadian
    Still, the bank's more positive stance on Tuesday has
prompted many of the country's primary dealers to pull forward
their forecasts for an interest rate hike, according to a
Reuters poll, with the central bank now expected to tighten
policy early next year. 	
    "The opinions diverge quite a lot," said Charles St-Arnaud,
economist and currency strategist at Nomura Securities in New
York. "With the door open now to a rate hike, if we have
positive data in Canada and generally good data also globally
they could go as soon as June or July, if needed."	
    TD on Wednesday brought forward its rate hike forecast from
2013. [ ID:nL2E8FIE8E]	
    Tulk saw a rate hike coming as early as September and
expected the Bank of Canada to raise rates by as much as 50
basis points by the end of 2012. He forecast the bank's ta rget
for the ove rnight lending rate - its main policy tool - would be
at 2 percent by the end of 2013.	
    "In our view this lines up perfectly with a macro backdrop
where we do have diminishing spare capacity and core inflation
that we anticipate at, or slightly above, the Bank of Canada's
2-percent target," he said. 	
    Canadian government bond prices were mostly higher. The
two-year bond, which is especially sensitive to Bank
of Canada interest rate moves, rose 1.5 Canadian cents to yield
1.326 percent. The benchmark 10-year bond climbed 20
Canadian cents to yield 2.046 percent.