* C$ hits overnight high of 86.60 U.S. cents
* Weak U.S. data eats away at C$'s gain
* Bond prices lower across the curve
By Frank Pingue
TORONTO, May 19 (Reuters) - The Canadian dollar was higher versus the greenback on Tuesday as an upbeat tone in equities gave a boost to the commodity-based currency, but it returned some of the gains after weak U.S. data sapped risk appetite.
Canada's currency was dragged from its overnight high after data showed a steep drop in U.S. housing starts that rekindled worries that the worst of the global financial crisis has not passed. [ID:nN18349440]
But the domestic currency still held above its close on Friday given the size of the rally it enjoyed on Monday and overnight when an upbeat tone in U.S. and overseas' equity markets kept demand for perceived riskier currencies alive.
"It's all the risk aversion theme, all equity markets, and I think that the FX markets in general will continue to derive their direction from stocks," said George Davis, chief technical strategist at RBC Capital Markets.
"But the mood has been spoiled a little bit by the housing starts data in the U.S. because they came out weaker than expected ... but if stocks are able to rally we should see (the U.S. dollar) sell off as risk aversion decreases."
At 9:15 a.m. (1315 GMT), the Canadian unit was at C$1.1607 to the U.S. dollar, or 86.15 U.S. cents, up from C$1.1791 to the U.S. dollar, or 84.81 U.S. cents, at Friday's close.
The Bank of Canada did not give an official close for the Canadian dollar on Monday as it was a holiday in Canada.
The Canadian dollar rallied as high as C$1.1548 to the U.S. dollar, or 86.60 U.S. cents overnight, which marked its highest level since May 12.
Canadian bond prices were pinned lower across the curve in a delayed reaction to Monday's activity when the U.S. Treasury market fell on hopes that the recession was easing, which lessened the appetite for more secure government debt. (Editing by Jeffrey Hodgson)