* Canadian dollar ends at 97.63 U.S. cents
* Bond prices fall steeply
* European Union and IMF agree to massive rescue plan
* Bank of Canada to reestablish Fed swap agreement
* U.S. crude ends more than 2 percent higher (Updates to close, adds details, quotes)
By Claire Sibonney
TORONTO, May 10 (Reuters) - The Canadian dollar soared almost 2 percent against its U.S. counterpart on Monday as global markets exhaled a huge sigh of relief after European nations and the International Monetary Fund agreed on an emergency aid deal aimed at preventing Greece's debt crisis from spreading.
The currency CAD=D4 outperformed the rest of the G10 group and shot to a high of C$1.0210 to the U.S. dollar, or 97.94 U.S. cents, early in the North American session.
Moves higher were held in check as more clarity was sought on the details and implications of the package.
European central banks began buying euro zone government bonds under a $1 trillion global emergency rescue package, sending the euro up broadly and world stocks surging as markets felt more secure moving away from the U.S. dollar and other safe-haven instruments.
"The market started off with a big bang today and that quickly faded. Not that the market lost but there wasn't any follow-through," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"Going forward, the move lower in dollar/Canada will very much depend on global risk sentiment, and that in turn will depend on the market's interpretation of the European deal because currently there are still a lot of unanswered questions regarding the detail of the rescue package as well as details about the (European Central Bank's) involvement."
The Bank of Canada said it would reestablish a US$30 billion currency swap agreement with the U.S. Federal Reserve in response to liquidity pressures in European markets. [ID:nN0949279]
The facility was part of a broader move by the Bank of England, the ECB, the Fed and the Swiss National Bank to prevent the spread of funding strains from Greece to other European countries.
The Canadian dollar closed the North American session at C$1.0243 to the U.S. dollar, or 97.63 U.S. cents, up sharply from C$1.0438 to the U.S. dollar, or 95.80 U.S. cents, at Friday's close.
The aid package helped the Canadian dollar recover part of its 2.8 percent slide from the week before, the steepest weekly drop since October.
"Canada is a beneficiary of a bid to all risk markets. The plan is audacious in a go-big or go-home kind of way," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"So short term, clearly the cause and effect has created a bid for a number of asset classes, but longer term it remains to be seen whether this is sustainable," he added.
The commodity-linked Canadian currency's move higher was also fueled by oil's rise, with U.S. crude futures ending near $77 a barrel. [O/R]
As well, Canadian housing starts inched up 1.3 percent in April, offering further evidence that recovery in the housing sector is a major component of Canada's economic recovery. [ID:nN10199655]
"There was no discernible impact on the market but it continued to confirm the buoyancy of the Canadian economy and that recovery is on the way and it plays into this slew of good data coming from domestic Canada," Strauss added.
"So that in itself is further supporting the view of an interest rate hike at the next meeting."
On Friday, the Canadian dollar bounced back from three-month lows after the jobs report for April, which showed record gains and put more pressure on the Bank of Canada to raise interest rates as soon as June.
BONDS GIVE BACK
Canadian government bond prices sagged across the curve as safe-haven assets fell out of favor in the wake of the European aid deal.
The move tracked U.S. Treasuries, which also tumbled after the massive euro zone plan eased concern about stocks and other riskier investments.
"Obviously what we saw last week was a lot of risk appetite sucked out of the market over concerns of the European fiscal crisis," said Ian Pollick, a portfolio strategist at TD Securities.
"Basically the financial world looks like a better place today.
The two-year government bond CA2YT=RR dropped 25 Canadian cents to C$99.12 to yield 1.939 percent, while the 10-year bond CA10YT=RR shed 65 Canadian cents to C$99.30 to yield 3.584 percent.
Canadian bonds lagged their U.S. counterparts at the short end of the curve, but outperformed at the long end. The Canadian 10-year bond yield was 4 basis points above the U.S. 10-year yield, compared with 8.6 basis points on Friday.
"So for our domestic market, we saw last week with risk market selloff, obviously Canadian and U.S. bonds were the big benefactors...there's a little bit of unwinding occurring today."
However, Pollick noted that the selloff was thwarted to an extent because attractive pricing encouraged fresh bids. (Additional reporting by Ka Yan Ng, editing by Peter Galloway)