* C$ hits session high of 86.78 U.S. cents
* Increased risk appetite fuels C$'s gain
* Bond prices close lower across curve (Recasts)
By Frank Pingue
TORONTO, May 19 (Reuters) - Canada's currency shot to its highest level in more than a week on Tuesday as a surge in Canadian equities, coupled with a rise in oil prices, gave a bid to the commodity-linked currency.
The bulk of the currency's rise was credited to the rise in Toronto's key stock index as Canadian stocks played catch-up with a gain in U.S. equities on Monday, when Canadian markets were closed for a holiday.
The rally allowed the Canadian dollar to resume its ascent after last week's 2.5 percent skid snapped a nine-week rally.
"Canada played a little bit of catch-up in the sense that some of the other commodity currencies like the (Australian and New Zealand dollars) have done a lot better," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"And obviously with the holiday yesterday I think a few of the participants may have been absent from the market."
During the session, the Canadian dollar rose as high C$1.1523 to the U.S. dollar, or 86.78 U.S. cents, its highest level since May 11.
By the end of the session the Canadian currency had eased slightly to C$1.1563 to the U.S. dollar, or 86.48 U.S. cents, up nearly 2 percent from C$1.1791 to the U.S. dollar, or 84.81 U.S. cents, at Friday's close.
The currency's rise came alongside a 338-point, 3.5 percent, rally in the Toronto Stock Exchange's S&P/TSX composite index .GSPTSE, a rise fueled partly by energy issues. [ID:nN19444975]
The price of oil rose as refinery problems in the United States stoked supply fears [ID:nSIN131895]. Oil prices often influence the direction of the Canadian dollar as oil is a key export of Canada.
Comments made by Bank of Canada Deputy Governor John Murray during a speech in Philadelphia had no noticeable impact on the currency. [ID:nNN19431095] Murray said Canada has less need than other countries to boost its economy with unusual steps such as printing money to buy assets
BONDS PRICES SLIDE
Canadian bond prices finished down 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 secure government debt.
"Some of what we saw today was a partial catch-up to yesterday's selloff in the U.S.," said Doug Porter, deputy chief economist at BMO Capital Markets.
"The best way to look at it is over the two days, and on that basis we saw a much milder rise in Canadian yields (than U.S. yields) and that's been par for the course recently both on the way up for yields and on the way down for yields."
Porter also said sharp rallies in Canadian equities and the Canadian dollar likely offset each other in regards to having any impact on the bond market.
The next Canadian data that could have an impact on bonds is Wednesday's consumer price index data for April, though recent CPI reports have not had a big impact on bonds.
The benchmark two-year Canadian government bond ended down 2 Canadian cents at C$100.29 to yield 1.105 percent, while the 10-year bond slipped 35 Canadian cents to C$105.18 to yield 3.898 percent.
The 30-year bond slipped 75 Canadian cents to C$118.70 to yield 3.898 percent.
Canadian bonds underperformed their U.S. counterparts across most of the curve. The 30-year bond yield was about 19 basis points below the U.S. 30-year yield, compared with around 23 basis points below on Friday. (Editing by Peter Galloway)