* C$ touches high of 95.37 U.S. cents
* Bonds fall, risk appetite up on strong economic data
* Canada C$1.4 bln bond due 2041 yields 3.489 pct (Updates figures, adds bond auction details)
By Jennifer Kwan
TORONTO, Sept 1 (Reuters) - Canada's dollar soared more than a penny against the U.S. currency on Wednesday and bond prices sank as risk appetite was revived on strong U.S. and overseas data that eased recent concerns about the recovery.
Major U.S. stock indexes rose more than 2 percent after a closely watched report showed U.S. manufacturing grew faster than forecast and chalked up a 13th straight month of expansion. [ID:nN01115840]
That followed data that showed China's manufacturing sector rebounded in August after slowing for several months, while Australia's economy grew at the fastest pace in three years last quarter.
The reports offered some good news for investors to hang on after a recent string of weak U.S. and Canadian data. [ID:nTOE68001O] [ID:nSGE67U0L3]
The currency's rise is "basically a reflection of better risk appetite" following the U.S. and overseas reports, which sent global equities higher, said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.
"Both the Australian data and the China data gave a little bit of relief. We've had some pressure on the global growth story," Chandler added.
The Canadian currency CAD=D4 rose as high as C$1.0485 to the U.S. dollar, or 95.37 U.S. cents, up sharply from C$1.0665 to the U.S. dollar, or 93.76 U.S. cents, at Tuesday's close. At 12:49 p.m. (1649 GMT), it was at C$1.0507 to the U.S. dollar, or 95.17 U.S. cents.
The Canadian dollar starts the month on a firm note after falling 3.6 percent in August.
No more domestic economic reports are due this week, leaving market players to consider how external data will influence the Bank of Canada heading into next week's rate decision. The bank has suggested further rate hikes will be weighed against both domestic and global developments.
The next key indicator will be Friday's U.S. payrolls report.
The bank's Sept. 8 rate decision is one of the closest calls in some time, with market pricing, as measured by a Reuters calculation of yields on overnight index swaps, roughly split between a quarter-point rate hike or a no change in interest rates BOCWATCH.
However, most of Canada's primary securities dealers, surveyed by Reuters on Tuesday, still forecast the central bank will raise its key rate by a quarter point to 1.0 percent. But they also forecast the rate increase will be the last of 2010 because of the slowing economy. [ID:nN31267387]
Canada's two-year bond CA2YT=RR fell 12 Canadian cents to yield 1.272 percent, while the 10-year issue CA10YT=RR dropped 73 Canadian cents to yield 2.860 percent.
Elsewhere, the Bank of Canada said its C$1.4 billion auction of 4.0 percent government of Canada bonds due June 1, 2041 produced an average yield of 3.489 percent. [ID:TOR007782]
"It was relatively well received," said Chandler.
"It helped that yields backed up so much prior to the auction, but in general Canada has underperformed relative to the U.S. over the last little while, so there were people that were looking for opportunities to go long Canadian assets." (Additional reporting by by Ka Yan Ng; editing by Rob Wilson)