* C$ down at 93.98 U.S. cents
* Hit highest level since Sept. 2008 earlier in day
* Bond prices firm after solid Canada, U.S. auctions
* Canadian bonds underperform U.S. Treasuries (Recasts, adds quote)
By Jennifer Kwan
TORONTO, Oct 7 (Reuters) - Canada's currency fell against the U.S. dollar on Wednesday after earlier touching a one-year high, as weakening oil prices and a lackluster showing on stock markets dragged the unit lower.
The currency turned south at midday as risk appetite waned, with U.S. stocks pulling back after two days of gains, while Toronto stocks were little changed. [.N] [.TO]
"People may be thinking the equity rally we've seen for the last little while may be running out of steam," said Jean-Philippe Blais, vice president foreign exchange products at BMO Capital Markets.
The Canadian dollar, like the equity market, often strengthens or falls depending on the risk appetite of international investors.
At 2:20 p.m. (1820 GMT), the Canadian unit was at C$1.0640 to the U.S. dollar, or 93.98 U.S. cents, down from C$1.0596 to the U.S. dollar, or 94.38 U.S. cents, at Tuesday's close.
Earlier in the day, the Canadian dollar shot up to 95 U.S. cents on an upbeat tone that spilled over from Tuesday when the Reserve Bank of Australia raised its interest rate, becoming the first central bank in the Group of 20 nations to tighten policy as the financial crisis abates. [ID:nSYD520296]
The Australian move fed hopes that the global economy is recovering and will boost equity markets and demand for commodities, which also helped to send gold to a record high above $1,048 an ounce. [GOL/]
But oil prices CLc1 slipped below $70 a barrel on Wednesday, boosted in part by a rebound in the greenback, which rose as the optimism that followed Australia's rate hike dissipated and traders saw the currency's decline as being overdone. [FRX/]
No Canadian data is due out until Thursday's housing starts report, which is expected to show the number of groundbreakings fell to a seasonally adjusted annualized rate of 148,000 in September from 150,400 in August.
On Friday, the market will focus on domestic jobs data for September. [ID:nN07480164]
BOND PRICES UP AFTER AUCTIONS
Domestic bond prices were higher across the curve, taking much of their cue from the bigger U.S. Treasury market where prices rose on a well received 10-year bond auction, said Mark Chandler, fixed income strategist at RBC Capital Markets. [US/]
There had been concerns heading into the week about whether the market could support the onslaught of supply.
Canada also had a relatively successful two-year bond auction, he added. The C$3.5 billion auction produced an average yield of 1.422 percent and bids from primary dealers totaled more than C$8.6 billion. [CA/AUC]
"Those two actions went reasonably well. Equity markets gave back the gains they were showing in futures to start the day. Those factors have largely weighed on bond yields," said Chandler.
The two-year CA2YT=RR bond ticked 4 Canadian cents higher at C$99.56 to yield 1.236 percent, while the 10-year bond CA10YT=RR climbed 10 Canadian cents to C$103.85 to yield 3.280 percent.
But the Canadian market underperformed rallying U.S. Treasuries, with the 10-year Canadian yield around 9.8 basis points above the U.S. curve, up from around 3.5 basis points on Tuesday. (Editing by Jeffrey Hodgson)