CANADA FX DEBT-C$ weakens on debt fears; Bank of Canada eyed

* C$ falls to C$0.9589 to the U.S. dollar, or $1.0429

* Bonds prices mostly higher

* Bank of Canada interest rate announcement Tuesday (Updates to close)

TORONTO, July 18 (Reuters) - Canada’s dollar weakened against its U.S. counterpart on Monday as fears of sovereign debt default in Europe and the United States undercut commodity prices and the market awaited an interest rate announcement by the Bank of Canada on Tuesday.

Equity markets also slumped as investors shied away from risky trades, helping give a boost to Canadian government bond prices, which were mostly higher.

The Canadian dollar is associated with risky assets because of Canada’s heavy reliance on commodity exports for economic growth.

“We’ve come into the week with continued worries about where the situation in Europe is headed as well as the risks of a credit rating downgrade in the U.S., which is playing negative for risk trades and the Canadian dollar,” said Avery Shenfeld, chief economist at CIBC.

The Reuters-Jeffries CRB index, a global commodities benchmark made up of a basket of 19 commodities, fell 0.72 percent.

The price of oil slid $1.31 a barrel to settle at $95.93 as policymakers in both the United States and Europe failed offer solutions to their debt problems. [ID:nL3E7II0KX]

The Canadian dollar ended the North American session at C$0.9589 to the U.S. dollar, or $1.0429, down from Friday’s close of C$0.9543 to the U.S. dollar, or $1.0479.

Investors have shifted their focus to an emergency meeting of EU leaders on Thursday, when a second bailout package for Greece will be under discussion, as well as the looming Aug. 2 deadline in the U.S. debt ceiling negotiations.

Domestically, market players will pore over the Bank of Canada’s interest rate decision on Tuesday, and its quarterly Monetary Policy Report the following day.

While an interest rate hike is not expected on Tuesday, the tone of the bank’s statement will give the market an indication of its thinking.

The bank may revise its growth expectations and say that inflation has been firmer than it had expected, said Mark Chandler head of Canadian fixed income and currency strategy at RBC Capital Markets. It might also forecast when the economy is likely to return to its potential.

“Last time around it was mid-2012,” that the bank said it expected the Canadian economy to return to potential. “If they stretch that out a little bit longer, that might take some of the steam out of the Canadian dollar,” Chandler said.

Canadian government bond prices were mostly higher on a safe-haven bid, with the exception of 30-year bonds.

Shenfeld said that with so little probability of rate hikes currently priced into the market, it is doubtful that the bond market would rally even if the Bank of Canada statement on Tuesday is fairly dovish.

Data on Monday showed foreigners more than doubled their investment in Canadian bonds in May from April, helping boost overall securities purchases to their highest level in a year.

The two-year bond rose 5 Canadian cents to yield 1.389 percent, while the 10-year bond was up 10 Canadian cents to yield 2.869 percent. The 30-year bond was down 5 Canadian cents to yield 3.555 percent. (Additional reporting by Claire Sibonney; editing by Peter Galloway )