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* C$ ends up at C$0.9799 to the U.S. dollar, or $1.0205
* Bond prices fall as risk sentiment drives stocks higher (Updates to close)
By Ka Yan Ng
TORONTO, Aug 15 (Reuters) - Canada's dollar finished more than a penny higher against the U.S. currency on Monday, as a solid rally in equity markets overcame disappointing U.S. manufacturing data.
Toronto's main stock market index notched its highest close in more than a week, driven by bargain-hunting, optimism over the euro zone debt crisis and acquisition activity on both sides of the border. [.TO]
U.S. stock indexes rallied for a third day on Monday as investors saw Google's (GOOG.O) $12.5 billion offer for Motorola Mobility (MMI.N) as a signal to jump back in after weeks of sharp selling. [.N] As well, Toronto-Dominion Bank (TD.TO) announced a deal to buy MBNA Canada's $8.6 credit card portfolio from Bank of America (BAC.N). [ID:nN1E77E06U]
"At the moment we're just ignoring the data and just looking at the bounce in equities. I would have expected a more negative reaction in the Canadian dollar to the numbers, frankly, but we didn't get that," said Shaun Osborne, chief currency strategist at TD Securities.
A gauge of manufacturing in New York state dented sentiment briefly, sending the Canadian dollar towards a session low that nearly matched Friday's close.
The data showed the sector unexpectedly contracted for the third month in a row in August with the general business conditions index sagging to minus 7.72 from minus 3.76 the month before. Economists polled by Reuters had expected a reading of zero. [ID:nN9E7ID022] [ID:nN1E77E04P]
But the currency bounced back fairly quickly, with the focus on riskier assets, particularly the stock markets, and the currency ended the session not far off its 200-day moving average.
The Canadian currency CAD=D4 finished at C$0.9799 to the U.S. dollar, or $1.0205, up from C$0.9907 to the U.S. dollar, or $1.0094, at Friday's North American close.
A soft U.S. economy could hurt the Canadian economy since the two countries share a massive trading link. This week's North American slate of data features several pieces for housing and inflation figures. ECON
"I can't help but think it's just going to confirm that the North American economy is in a general slowdown. That should weigh on the Canadian dollar," said John Curran, senior vice-president at CanadianForex.
Still, the loonie has held in "relatively well" compared with other major currencies, he said.
Both Curran and Osborne did not discount the possibility the Canadian dollar could take another run at weakening to parity with the U.S. dollar in the short-term.
Bond prices were lower across the curve, with flows directed away from the relative safety of government bonds and into world stocks.
Canada's two-year bond CA2YT=RR fell 11 Canadian cents to yield 0.991 percent, while the 10-year bond CA10YT=RR dropped 29 Canadian cents to yield 2.501 percent. (Reporting by Ka Yan Ng; editing by Rob Wilson)