* C$ up at 95.33 U.S. cents
* Bond prices softer across curve
* 2-year bond auction sees solid demand (Updates to midafternoon, adds details from 2-year bond auction, quotes)
By Jennifer Kwan
TORONTO, July 7 (Reuters) - Canada's dollar climbed against its U.S. counterpart on Wednesday as oil prices rose and U.S. stocks, a key barometer of risk appetite, rallied on a rosy outlook from institutional investor State Street.
Fears about the strength of the economic recovery eased after State Street (STT.N) said it would post second-quarter operating earnings above expectations, lifting bank stocks there. [.N] [ID:nN07140060]
In Canada, Toronto's main stock index rallied on the rise in oil prices and a deal by Total SA (TOTF.PA) to buy UTS Energy Corp UTS.TO, which boosted prospects for the powerhouse energy sector. [.TO]
Oil, a key Canadian export whose price movements often impact the direction of the currency, rose toward $74 a barrel on hopes an improving economic picture will result in a drop in U.S. crude inventories. [O/R]
But part of the Canadian dollar's move higher was as much due to there being no "big negative news out today" giving investors a break from concerns about global growth, said Michael Gregory, senior economist at BMO Capital Markets.
"It's a case where we are seeing equity markets bouncing back, commodity prices for the most part improving as well," said Gregory. "I think people realized things have cheapened up a little bit on both the equity and commodity side."
At 1:58 p.m. (1758 GMT), the Canadian dollar CAD=D4 was at C$1.0490 to the U.S. dollar, or 95.33 U.S. cents, up from Tuesday's finish at C$1.0557 to the U.S. dollar, or 94.72 U.S. cents.
David Bradley, director of foreign exchange trading at Scotia Capital, said technical factors were also supportive.
"We failed (to weaken below) the C$1.0680 area a number of times so a lot of it is a technical reversal," said Bradley.
FIRM DEMAND AT TWO-YEAR AUCTION
Canada's auction of 2-year bonds met with firm demand on Wednesday, helped by recent data suggesting the recovery is cooling, which makes the Bank of Canada less likely to tighten monetary policy aggressively.
"Two years look a little more attractive in an environment where overnight rates may not be rising as aggressively as you thought over the next year or two," said BMO's Gregory.
The two-year yield has dropped below 1.5 percent from above 2 percent in April as fears of slowing global growth cooled rate hike expectations.
The sale of Canada's C$3 billion, 2 percent Government of Canada bonds due Sept. 1, 2012 yielded an average 1.565 percent, down from 1.858 percent at the previous auction. CABONEK
Bids from primary dealers totaled C$7.64 billion, resulting in a bid-to-cover ratio of 2.5. The ratio is a measure of investor demand and a reading above 2 generally indicates a decent auction.
Canadian government bonds were flat to lower across the curve on Wednesday as money flowed to equity markets.
The two-year government bond CA2YT=RR was down 8 Canadian cents to yield 1.457 percent, while the 10-year bond CA10YT=RR sank 47 Canadian cents to yield 3.127 percent. (Editing by Jeffrey Hodgson)