* Ends at C$0.9604 to the U.S. dollar, or $1.0412.
* Extends gains after strong Ivey PMI data
* C$ rises in seven of last eight sessions
* Bond prices weaker across the board
* Two-year bond auction meets with firm demand (Updates to close)
By Ka Yan Ng
TORONTO, April 6 (Reuters) - The Canadian dollar CAD=D4 powered to a three-year high against its U.S. counterpart on Wednesday, underpinned by firm oil prices and the appeal of the country's overall economic health, but the latest gains drew words of caution from analysts.
Already rising in the overseas session, the currency got a further shot in the arm after the Ivey Purchasing Managers Index showed purchasing activity rose to 73.2 last month from 70.8 in February. [ID:nN06114698]
The data added to the growing view that the Bank of Canada will raise interest rates in the coming months, which has also helped the currency's resiliency.
The currency closed higher for the seventh time in the past eight sessions, for a gain of about 1.6 percent. It finished at C$0.9604 to the U.S. dollar, or $1.0412, up from Tuesday's North American finish at C$0.9639 to the U.S. dollar, or $1.0375.
But it closed down moderately from an earlier high of C$0.9569 to the U.S. dollar, or $1.0450, its strongest level since November 2007. It is still a long way from the record high of that same month, which sits at C$0.9059 to the U.S. dollar, or $1.1039, according to Thomson Reuters data.
The currency's appreciation, although gradual this year, has piqued concern among some analysts at current levels, particularly for a country with an export-oriented economy.
"At this point right now, if it continues to be this strong, businesses might really start to suffer from that," said Mazen Issa, macro strategist at TD Securities.
Still, Canada's high-flying dollar may have already reached its strongest levels against the U.S. currency for the next year, according to a Reuters poll. Median forecasts show the currency is expected to ease throughout the coming 12 months. [ID:nN06160269] [CAD/POLL]
Technical chart points are vague around these levels because the currency has not spent much time here, analysts say.
"The risk for the Canadian dollar is that it moves too far, too quickly and the central bank delays tightening as a consequence, or attempts to talk the currency down," said Fergal Smith, managing market strategist at Action Economics.
He has pencilled in a rate hike call for July, but said a more hawkish statement by the Bank of Canada at next Thursday's Monetary Policy Report could bring forward that call.
Yields on overnight index swaps, which trade based on expectations for the central bank's key policy rate, have fully priced in a rate hike by September. But odds of July have edged up in recent sessions. BOCWATCH
TWO-YEAR BOND NETS STRONG DEMAND
While tighter monetary policy is expected later this year, demand was still strong for the two-year bond, the part of the curve that is particularly sensitive to interest rate changes.
Canada's C$3.5 billion auction of two-year bonds, due 2013, netted solid demand. The bid-to-cover ratio was 2.6177 for the new bond, down slightly from 2.69 in March. But Smith said the ratio still compared favorably to the recent average.
The ratio is a measure of investor demand and a reading above 2 generally indicates a decent auction.
"Yields have backed up and they're back inside of the peak reached in February," said Smith. "The Canadian two-year yield is trading more than 100 basis points over Treasuries."
Overall, Canadian bond prices were softer across the curve, with the two-year bond CA2YT=RR down 5 Canadian cents to yield 1.889 percent, while the 10-year bond CA10YT=RR lost 31 Canadian cents to yield 3.422 percent. The bonds mostly outperformed against their U.S. counterparts. (Reporting by Ka Yan Ng; editing by Rob Wilson)