CANADA FX DEBT-C$ touches 4-week low on euro zone fears

*C$ at C$0.9930 vs US$, or $1.0070

*Bonds rally across curve

TORONTO, Sept 6 (Reuters) - The Canadian dollar hit its weakest level against the U.S. dollar in nearly four weeks on Tuesday as investors worried that the euro zone’s debt crisis was worsening and that the U.S. economy was slipping back into recession.

Sentiment was hit by fears of exposure to both euro zone debt, while Switzerland’s central bank shocked markets by setting a floor for the euro/Swiss exchange rate in an effort to curb franc strength. [FRX/]

“The removal seemingly of the Swiss as a safe has meant that the available safe havens or available ports of liquidity are slightly reduced, so the U.S. dollar is holding in slightly better on that,” said Jeremy Stretch, currency strategist at CIBC in London.

Following dismal U.S. employment data last Friday, focus is also on the Bank of Canada’s policy announcement on Wednesday at 9 a.m. (1300 GMT), and Canadian jobs data at the end of the week.

“Clearly the backwash from Friday’s (U.S.) payrolls isn’t particularly encouraging but I think it’s more so on the euro zone side of the equation,” Stretch said. “So clearly when we were seeing Italian spreads and yields moving up fairly dramatically yesterday, I think that was a sign that the risk parameters are continuing to climb once again.” .

At 9:40 a.m. (1340 GMT), the Canadian currency CAD=D4 stood at C$0.9930 to the U.S. dollar, or $1.0070, down sharply from Friday's North American session close of C$0.9842 to the U.S. dollar, or $1.0161. Most North American markets were closed on Monday for the Labor Day holiday. Earlier on Tuesday, the Canadian dollar fell as low as C$0.9967, or $1.0033, its weakest level since Aug. 11.

Stretch warned the currency could see parity on Tuesday if the U.S. Institute for Supply Management’s August nonmanufacturing data due at 10 a.m. disappoints.

Canadian bond prices followed U.S. Treasuries higher across the yield curve. [US/]

The two-year bond CA2YT=RR was up 13 Canadian cents to yield 0.891 percent, while the 10-year bond CA10YT=RR rallied 64 Canadian cents to yield 2.232 percent. (Reporting by Claire Sibonney; editing by Peter Galloway)