(Adds comments and Bank of Canada rate announcement)
* Canadian dollar roars back above par versus U.S. dollar
* Concerns about U.S. financial sector spark the rally
* Bank of Canada leaves interest rate steady at 3 percent
By Frank Pingue
TORONTO, July 15 (Reuters) - The Canadian dollar raced to a six-week high on Tuesday as pressing concerns about the health of the U.S. financial sector pulled the greenback lower while the Bank of Canada held interest rates steady.
Domestic bond prices remained higher across the curve as dealers unloaded risky assets like stocks to scoop up more secure investments like government debt given the worsening effects of the credit crisis.
At 10:05 a.m. (1405 GMT), the Canadian currency was at US$1.0002, valuing a U.S. dollar at 99.98 Canadian cents, up from C$1.0052 to the U.S. dollar, or 99.48 U.S. cents, at Monday's close.
Earlier, the domestic currency rose as strong as US$1.0022, valuing a U.S. dollar at 99.78 Canadian cents, its highest since June 3.
The rally in the Canadian dollar came alongside rallies in a number of other currencies as the U.S. government's plan to boost confidence in the financial system left wider concerns after a positive initial reaction.
Last week, U.S. banking regulators seized mortgage lender IndyMac Bancorp Inc after withdrawals by panicked depositors led to the third-largest banking failure in U.S. history.
Over the weekend the U.S. government tried to reinstate market confidence with a package to shore up Freddie Mac and Fannie Mae, the two largest U.S. providers of mortgage funding.
"People are focused on what could be not a single event but more a bleeding of the U.S. financial system," said David Watt, senior currency strategist at RBC Capital Markets.
"So it's obvious that people are finding any port in the storm right now and that's why everything is strengthening against the U.S. dollar."
The Canadian currency changed little immediately after a widely expected announcement by the Bank of Canada to leave its key rate steady at 3.00 percent. The bank also said inflation could rise above 4 percent for the first time since 2003.
"It doesn't represent a major change from previous comments from the Bank of Canada where they seem to be putting slightly greater weight in terms of the upside risks to inflation," said Paul Ferley, assistant chief economist at Royal Bank of Canada. "I think attention is just more focused on the U.S. dollar and Canada is just sort of going along for the ride."
Ferley also said the market could be waiting until the Bank of Canada's Monetary Policy Report Update and press conference on Thursday for more clarification in terms of the central bank's characterization of the economy.
Canadian bond prices rose as concerns about a fragile financial sector triggered sharp stock market declines and ramped up demand for secure assets.
The Toronto Stock Exchange's main index skidded 2 percent to its lowest in over three months shortly after the open while the Dow Jones industrial average fell nearly 2 percent to its lowest in two years.
"We just got that rally ongoing, curve-steepening ongoing, and it's all a function of the financial market pessimism in the U.S.," " said Eric Lascelles, chief economics and rates strategist at TD Securities. "That seems to be the focus these days and that's where the focus is sitting for Canada also."
The two-year bond was up 7 Canadian cents at C$101.20 to yield 3.084 percent. The 10-year bond climbed 10 Canadian cents to C$104.55 to yield 3.695 percent.
The yield spread between the two-year and 10-year bond was 61.1 basis points, up from 58.9 basis points, unchanged from the previous close.
The 30-year was up 5 Canadian cents at C$116.10 for a yield of 4.049 percent. In the United States, the 30-year treasury yielded 4.436 percent.
The three-month when-issued T-bill yielded 2.29 percent, down from 2.31 percent at the previous close. (Editing by Frank McGurty)