* C$ at C$0.9695, or $1.0315
* Bonds mixed across the curve
By Solarina Ho
TORONTO, July 12 (Reuters) - The Canadian dollar pared hefty losses against the U.S. dollar on Tuesday morning following speculation that the European Central Bank was acting more forcefully to stem the euro zone debt crisis.
Traders cited talk that the European Central Bank was buying bonds of debt-plagued euro zone nations for the first time in three months.
"Obviously, rumors overnight that the ECB stepped up into the Italian bond market has really turned risk around and with that we've seen a pretty big recovery in stock futures and with the Canadian dollar this morning," said Steve Butler, director of foreign exchange trading at Scotia Capital.
Also supporting the currency was data on Tuesday that showed Canada's trade deficit narrowed slightly in May to C$814 million ($839 million) from C$857 million in April, helped by higher exports, primarily to the European Union. [ID:nN1E76B02P]
"It helped Canada a little bit. but really, it's not about the data here, it's about the risk sentiment with all the issues going on in the euro zone," Butler said.
"There's only a few real pieces of data these days that matter a lot to the market. Certainly trade may be a bit of a factor, but not really anything that's really going to boost Canada's fortunes today."
At 9:21 a.m. (1321 GMT), the currency CAD=D4 was at C$0.9695 to the U.S. dollar, or $1.0315, slightly weaker than Monday's North American finish of C$0.9690, or $1.0320.
Earlier it traded as low as C$0.9780 on fears that euro zone leaders were failing to take action to prevent the spread of the debt crisis. [FRX] [ID:nLDE76B0ID]
"The market is recovering quite nicely and I think that has caught the market long dollar. We've seen a big correction this morning once New York came in," Butler said.
He said the Canadian dollar had likely hit its session low against the U.S. dollar and could strengthen to as high as C$0.9630/40 against the U.S. dollar.
Canadian bond prices were mixed across the curve as investors flight to safety was tempered by optimism of a resolution in Europe.
The two-year bond CA2YT=RR was off 2.5 Canadian cents to yield 1.436 percent, while the 10-year bond CA10YT=RR was up 8 Canadian cents, yielding 2.889 percent. (Reporting by Solarina Ho; editing by Peter Galloway)