* C$ falls to 95.42 U.S. cents
* Bonds surge as European risks reawakened
* Next up: Bank of Canada rate decision on Wednesday
By Ka Yan Ng
TORONTO, Sept 7 (Reuters) - The Canadian dollar closed near its session low against the U.S. currency on Tuesday on fresh concerns about European banks, with investors also focused on the Bank of Canada's interest rate decision on Wednesday.
In a holiday-shortened week, Canadian markets were greeted with new concerns on European banking as the Wall Street Journal reported "stress tests" published more than a month ago underestimated some lenders' holdings of potentially risky government debt.
The renewed concerns fed into aversion for riskier assets, pulling down stock markets worldwide and the price of oil, while boosting appetite for government debt. [MKTS/GLOB]
But oil pared losses after a deadly explosion ripped through a Mexican oil refinery, raising concerns that Mexico, a top U.S. crude supplier, would have to import more fuel.
"With the global economic backdrop as it is, people are going to tend towards a risk aversion trade," said John Curran, senior vice president at CanadianForex, a commercial foreign exchange dealing firm.
Curran, who is one of the minority of analysts who see no change in interest rates by the Bank of Canada on Wednesday, said technical charts for the 100- and 200-day moving averages signal a bearish trend for the Canadian dollar.
"Even if the Bank of Canada does raise rates tomorrow, I think the Canadian dollar is going to suffer eventually."
The Bank of Canada decides on interest rates on Wednesday in one of the closer calls in some time. Markets on Tuesday were pricing in about a 64 percent probability of a quarter-point hike, according to a Reuters calculation based on yields on overnight index swaps. BOCWATCH
A Reuters poll of 41 forecasters, including Canada's 12 primary dealers, showed a majority see a hike. [CA/POLL]
The Canadian dollar finished at C$1.0480 to the U.S. dollar, or 95.42 U.S. cents, almost matching its session low at C$1.0483. The finish was down from Friday's Bank of Canada closing level at C$1.0393 to the U.S. dollar, or 96.22 U.S. cents. Markets were closed on Monday.
Canadian bond prices surged across the curve, tracking U.S. Treasuries on Tuesday, as worries about the health of European banks pushed up bids for safer assets. [US/]
The European banking issue was largely pushed to the sidelines over the summer, but the fears were reawakened by the newspaper report.
"People are realizing it's not as benign as what they had hoped," said David Tulk, senior macro strategist at TD Securities.
Even with the resurgence of European jitters, the Bank of Canada is still more likely to focus on the U.S. economy in its statement to accompany its rate announcement on Wednesday.
"The bank did acknowledge in July that the immediate threat posed by sovereign risk had faded -- and that's generally still true," said Tulk.
"But generally the fear is that the U.S. has certainly slowed by more than what the bank had expected," he added, noting that Canada's proximity to the United States likely "takes on a greater amount of importance in the bank's eyes."
The two-year Canada bond CA2YT=RR soared 19 Canadian cents to yield 1.281 percent, while the 10-year bond CA10YT=RR advanced C$1.10 to yield 2.819 percent. Canadian bonds outperformed across the curve against U.S. Treasuries, except in the 30-year maturities. (Editing by Jeffrey Hodgson)