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* C$ at C$0.9489 vs US$, or $1.0539
* US$ rallies despite ongoing debt ceiling uncertainty
* Bond prices rise, outperform U.S. Treasuries
By Andrea Hopkins
TORONTO, July 27 (Reuters) - The Canadian dollar eased from its recent 3 1/2-year high on Wednesday as the battered greenback rebounded following a sell-off this week, overcoming anxiety about U.S. debt talks and a possible default.
The U.S. dollar rallied against major currencies, including the Canadian dollar, after earlier falling to a record low against the Swiss franc CHF= and a four-month low against the yen JPY=.
Traders said the rebound by the U.S. currency was likely a short-term correction after the unit dropped quickly this week as talks aimed at averting a U.S. debt default remained deadlocked ahead of an Aug. 2 deadline to raise the U.S. federal debt ceiling. [FRX/]
"I don't know it's anything more significant than a short-term correction, because the dollar had been more or less oversold in the short term," said Darcy Browne, managing director of capital markets trading at CIBC.
While the Canadian dollar has attracted more foreign investors in recent weeks as buyers look for an alternate safe-haven in commodity-linked currencies, Browne said its links to the troubled U.S. economy have not been completely forgotten.
"The Canadian dollar can strengthen moving forward, I just think its proximity to the U.S. and the reliance on the U.S. as a trading partner, and the uncertainty that's being built around the future of their economy, is more or less dampening the enthusiasm for the Canadian dollar."
While tension is increasing in the United States over the inability of leaders and lawmakers to reach an agreement on deficit reduction, raising the prospect of a crippling U.S. debt default, any eventual resolution is expected to vault the U.S. dollar higher in the short term.
The Canadian dollar CAD=D4 closed at C$0.9489 to the U.S. dollar, or $1.0539, slightly down from the North American session close on Tuesday of C$0.9428 to the U.S. currency, or $1.0607.
"We could get some positive news out of the United States in the coming week which could probably take us up anywhere around the C$0.96, C$0.9650 level, where I would fully expect to see buying of Canadian dollars. That's the level where foreigners would have interest again," Browne said.
Data on Wednesday morning that showed U.S. durable goods orders unexpectedly fell in June did not help the Canadian currency. For more see [ID:nN1E76Q07T].
On Tuesday, the Canadian currency CAD=D4 climbed as high as C$0.9407 to the U.S. dollar, or $1.063, its strongest since November 2007 when it hit a modern-day high.
Canadian government bond prices rose as investors fled falling stock markets.
The two-year Canadian government bond CA2YT=RR rose 1 Canadian cent to 1.476 percent, while the 10-year bond CA10YT=RR rose 13 Canadian cents to yield 2.878 percent.
Canadian bonds outperformed U.S. Treasuries. The Canadian 10-year yield was 10.6 basis points below its U.S. counterpart, compared with 6.1 basis points below on Tuesday. (Editing by Jeffrey Hodgson)