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* Hits session low of C$1.0538, or 94.89 U.S. cents
* Fear grows that Europe will drag on Canadian growth
* Bonds mixed, but 30-year auction sees good demand
By Claire Sibonney
TORONTO, May 19 (Reuters) - The Canadian dollar hit its weakest level against the U.S. currency since May 7 on Wednesday, hurt by falling commodity prices and a growing fear Europe's woes will hurt Canada's economic recovery.
Jittery investors, already worried that deep government spending cuts in Europe will stifle growth, sent prices of global equities and other riskier assets even lower after Germany clamped down on short-selling of some securities. [MKTS/GLOB]
"There continues to be a scramble for U.S. dollar liquidity and I think that's part of why the Canadian dollar is suffering right now," said Tom Nakamura, a fixed-income portfolio manager at AGF Investments.
"The underlying issues, the problems in Europe, are still there," he added.
At 1:15 a.m. (1715 GMT), the Canadian dollar CAD=D4 was at C$1.0480 to the U.S. dollar, or 95.42 U.S. cents, down from C$1.0370 to the U.S. dollar, or 96.43 U.S. cents, at Tuesday's close.
The currency hit a session low of C$1.0538, or 94.89 U.S. cents.
Germany surprised markets on Tuesday with a ban on "naked" short-selling of some stocks and bonds. In naked short-selling, a trader sells a financial instrument short, betting that it will fall, but without first borrowing the instrument or ensuring it can be borrowed, as would be done in conventional short-selling. [ID:nN18512882]
The move sent shockwaves through markets and contributed to a drop in commodity prices, including a slide in oil prices to their lowest intraday level since Sept. 30. [O/R]
BMO Capital Markets warned in a note to clients that the European situation poses "serious risks" to Canada's economic outlook, largely through financial market and commodity price channels as opposed to direct impacts on trade.
"We have already nudged lower our view on the Canadian dollar, and the downside risks for the currency are now much more prominent than a few short weeks ago," wrote economists Doug Porter and Benjamin Reitzes.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, have fallen in recent weeks and on Wednesday indicated just a 51 percent chance of a June 1 rate increase. BOCWATCH
Currencies tend to strengthen as interest rates rise as higher rates attract capital flows.
The European news overshadowed a report on Wednesday that showed Canadian wholesale trade grew twice as much as expected in March at 1.4 percent. [ID:nN19110938]
Canadian bonds prices were mixed, though an auction for C$1.4 billion in 30-year bonds saw firm demand. [CA/AUC]
The two-year government bond CA2YT=RR was up 8.5 Canadian cent to yield 1.724 percent, while the 10-year bond CA10YT=RR dropped 7 Canadian cents to yield 3.406 percent. (Additional writing by Jeffrey Hodgson; editing by Rob Wilson)