* C$ closes higher at 87.87 U.S. cents
* Hits 7-month high overnight, but pares gains
* Bonds fall, market awaits supply
By Ka Yan Ng
TORONTO, May 21 (Reuters) - The Canadian dollar shrugged off an bout of risk aversion and lower oil prices on Thursday, rebounding from an early slide to notch its third straight higher close.
The currency turned higher as market worries that the United States, like Britain, might run the risk of losing its coveted AAA credit rating dragged the greenback lower.
Ratings agency Standard and Poor's issued a warning on Thursday that Britain's outlook was "negative" and no longer "stable". [ID:nLL627240] [ID:nN21292647]
"Coming on the heels of S&P's credit watch on the U.K., the market is sensitive ... to rating agency issues," said Jack Spitz, managing director of foreign exchange at National Bank Financial Group.
He said the Canadian dollar was being swept up in the fray but was underperforming relative to other currencies.
The Canadian unit CAD=D3 finished at C$1.1380 to the U.S. dollar, or 87.87 U.S. cents, up from C$1.1404, or 87.69 U.S. cents, at Wednesday's close.
Early on Thursday it rose as high as C$1.1347 to the U.S. dollar, or 88.13 U.S. cents, a seven-month high, before turning lower on renewed economic worries and lower crude prices.
The ratings news and speculation overrode the earlier influence of oil prices, which often dictate the direction of the Canadian dollar. The price of crude was driven from six month highs as signs of job market weakness stoked concerns about the U.S. economy. [ID:nSIN101873]
The currency also shrugged aside data that showed wholesale trade in Canada slipped by 0.6 percent in March from February, the seventh fall in the last eight months. [ID:nN21260167]
Canadian bonds fell hard across the curve, failing to capitalize on sharp losses on North American equity markets as fears took hold on market speculation of a U.S. credit downgrade and supply concerns.
"There was an underlying negative tone that came as result of the S&P outlook actions on the U.K. There were people transposing that to the situation in the U.S.," said Mark Chandler, fixed income strategist at RBC Capital Markets.
Exacerbating the pressure was disappointment with the New York Federal Reserve's purchase of treasuries on Thursday, coupled with the announcement that the U.S. Treasury will sell $101 billion in notes next week.
"All those factors seemed to conspire against the bond market and you didn't get any benefit at all from the falling equities," Chandler said.
Toronto's main stock index fell on Thursday after a two-day rally as the drop in oil prices from six-month highs pressured energy shares. [ID:nN21308678] U.S. stocks also slid in a broad selloff. [ID:nN21307842]
The benchmark two-year government bond fell 10 Canadian cents to C$100.19 to yield 1.154 percent, while the 10-year bond fell C$1.12 to C$104.08 to yield 3.27 percent.
The 30-year bond lost C$1.65 to C$117.05 to yield 3.985 percent. The U.S. 30-year yield was 4.325.
Canadian bond performance was mixed compared with their U.S. counterparts across the curve. The 30-year bond yield was about 34 basis points below the U.S. 30-year yield, compared to about 24 basis points on Tuesday. (Reporting by Ka Yan Ng; editing by Rob Wilson)