* C$ falls to C$0.9611 to the U.S. dollar, or $1.040
* Tumbling oil, equities weigh on currency
* Canada trade surplus grows, U.S. trade deficit rises
* Bond prices reverse early losses, rally across curve
* 2-year auction averages 1.873 percent (Updates to afternoon, recasts, adds bond auction results)
By Claire Sibonney
TORONTO, May 11 (Reuters) - Canada's dollar reversed early gains against the U.S. dollar on Wednesday, tracking equities and commodity prices lower, while a two-year government bond auction met with solid demand.
By midday, oil prices had tumbled 4 percent with U.S. crude futures back below $100 a barrel after inventories showed crude stocks rose more than expected last week and soft Chinese inflation data suggested the world's second largest economy might be cooling. [O/R]
Stock markets on both sides of the border were also down sharply as oil and gas shares fell. [.TO] [.N]
"You're dealing with a potential risk-off tone right now, unfortunately, and the Canadian dollar gets caught in the crossfire as do commodities and equities as well," said David Tulk, chief Canada macro strategist at TD Securities.
Earlier, the currency had rallied on the back of rising overseas markets, better-than-expected Canadian trade data and talk of positive flows on the back of foreign acquisitions of Canadian companies and interest from Asian central banks.
"We're one step forward, two steps back," Tulk said.
Canada's trade surplus bounced higher in March after two months of declines as broad increases in exports outstripped higher imports. [ID:nN11188678] In contrast, the U.S. trade deficit rose more than expected. [ID:nCAT005430]
At 1:11 p.m. (1711 GMT), the Canadian dollar CAD=D4 was at C$0.9611 to the U.S. dollar, or $1.040, down from Tuesday's North American session close of C$0.9577 to the U.S. dollar, or $1.0442. Earlier, it hit a high of C$0.9513 against the U.S. dollar, or $1.0512, its strongest level since May 4.
BOND PRICES RALLY, STRONG TWO-YEAR AUCTION
Canadian government bond prices rallied across the curve, tracking U.S. Treasury prices as the market moved into risk-off mode.
"The Canadian curve is generally moving in sympathy," said Tulk, noting, however, that Canadian bond prices were underperforming their U.S. counterparts given the better-than-expected domestic trade data.
The two-year Canadian government bond CA2YT=RR climbed 3 Canadian cents to yield 1.708 percent, while the 10-year bond CA10YT=RR advanced 19 Canadian cents to yield 3.244 percent.
Canada's sale of two-year government bonds also met with healthy appetite, helped by persistent worries about global growth, euro zone debt woes and Canada's relatively strong fundamentals. [ID:nTZOBGE70U]
The C$3.5 billion auction produced an average yield of 1.873 percent and a bid-to-cover ration of 2.52.
The ratio is a measure of investor demand and a reading above 2 typically indicates a decent auction. (Editing by Peter Galloway)