* C$ falls to $1.0260
* Bonds firm across curve in flight to safety
* Canada Q4 industrial capacity use misses estimates
TORONTO, March 14 (Reuters) - The Canadian dollar weakened against the U.S. dollar on Monday morning after data on Canadian industry capacity use in the fourth quarter came in below market expectations.
Before the data was released, the Canadian dollar CAD=D4 was already weakening, injured by a selloff in world stocks and falling oil prices on concerns about the economic impact of Japan's devastating earthquake and tsunami. [MKTS/GLOB]
Japan scrambled to avert a meltdown at a stricken nuclear plant on Monday after a hydrogen explosion at one reactor and exposure of fuel rods at another. [ID:nL3E7EC0D6]
John Curran, senior vice president at CanadianForex, said overall market sentiment was shying away from risk. He pointed to dangers from continuing unrest in North Africa and the Middle East, the impact of the Japan catastrophe, oil-price weakness, and the "relatively benign" Canadian data as reasons for the market to shift toward the safe-haven greenback.
The Canadian currency fell as low as C$0.9753 to the U.S. dollar, or $1.0253, weakening about 8 ticks from its level before the data was released.
By 9:21 a.m. (1321 GMT), it was at C$0.9747 to the U.S. dollar, or $1.0260, down from Friday's North American session close at C$0.9711 to the U.S. dollar, or $1.0298.
Canadian industries ran at 76.4 percent of capacity in the fourth quarter of 2010, barely edging up from a downwardly revised 76.2 percent in the previous quarter, Statistics Canada said. Economists surveyed by Reuters had forecast a 79.0 percent capacity-utilization rate in the fourth quarter. [ID:nSCLEEE7A6]
The weaker-than-expected figures adds to a recent spate of soft Canadian data that has firmed expectations that the Bank of Canada will not raise interest rates soon. According to a calculation of yields on overnight index swaps, the central bank's September rate-setting date is the first for which the market is fully pricing in a rate increase. BOCWATCH
Curran said he expected the Canadian dollar to test the long-term trendline U.S. dollar resistance level at C$0.9880 to the U.S. dollar. But it will likely be a drift to that level, rather than a quick drop, he said.
"I think this will be a little bit of a corrective move here. The longer-term trend is still positive for Canada but the short-term factors are playing into a bit of the weakness," he said.
Canadian government bonds caught a safe-haven bid, pushing prices higher across the curve. The two-year Canadian government bond CA2YT=RR rose 7 Canadian cents to yield 1.708 percent, while the 10-year bond CA10YT=RR advanced 26 Canadian cents to yield 3.243 percent. (Reporting by Ka Yan Ng. Editing by Peter Galloway)