* C$ ends at C$0.9903 vs US$, or $1.0098 * BoC says economy "somewhat stronger" * Rate hike expectations rise slightly * U.S., China PMI data also boosts sentiment * Bond prices lower across the curve By Jon Cook TORONTO, April 2 (Reuters) - The Canadian dollar rallied to it strongest level against the U.S. currency in nearly two weeks on Monday, boosted by a more upbeat outlook from the head of the Bank of Canada and stronger U.S. and Chinese manufacturing data. Canada's economy is doing better than expected and the threat from the European debt crisis has lessened, Bank of Canada Governor Mark Carney said in a speech to a business audience in Kitchener-Waterloo, Ontario, even while warning that high household debt levels are not sustainable. The currency hit a session high after Carney spoke. The overnight index swap market, which trades based on expectations for the central bank's key policy rate, showed that traders increased bets on a rate hike in late 2012, though a full hike is not priced in until next year. "He indicated the Canadian economy was perhaps not as far from its non-inflationary potential as they earlier thought," said Avery Shenfeld, chief economist at CIBC World Markets, adding the central bank is now more likely to "lean towards hiking rates before the Fed ends up doing so." Expectations of higher interest rates tend to help currencies strengthen by attracting international capital flows. Th e U.S. Federal Reserve said in January it would likely hold its key interest rate at its present level near zero until late 2014. But Shenfeld warned that if the Canadian dollar strengthens materially, that would reduce the odds that the Bank of Canada would be willing to push it up further by raising rates. Commodity-linked currencies were initially boosted on Monday after data on Sunday showed China's official Purchasing Managers' Index (PMI) jumped to an 11-month high in March, beating forecasts. On Monday, the Institute for Supply Management said its index of U.S. factory activity rose to 53.4 in March from 52.4 in February, topping economists' consensus forecast for a reading of 53.0. Canada's manufacturing sector also accelerated to its fastest rate of the year in March, according to the RBC Canadian Manufacturing Purchasing Managers' Index released on Monday. "All that is pretty positive for Canada in the short term," said Steve Butler, a director of foreign exchange trading at Scotia Capital. The Canadian dollar broke out of its recent narrow range, hitting a near two-week high at C$0.9889 against the U.S. currency, or $1.0111. "Canada is finally down through C$0.9950, which has been very sticky," added Butler. The Canadian dollar ended the North American session at C$0.9903 against the U.S. dollar, or $1.0098, up from Friday's close at C$0.9975 versus the greenback, or $1.0025. It was one of the currency's big gest single-day gains this year. The Canadian dollar has gained nearly 3 percent this year, rising as Europe's debt crisis has stabilized and the U.S. economic recovery has shown steady progress. Reflecting the broad increase in risk sentiment, Canadian bond prices slid across the curve. The 2-year bond was down 2 Canadian cents to yield 1.210 percent, while the 10-year bond fell 18 Canadian cents to yield 2.132 percent.