CANADA FX DEBT-C$ firms as US$ struggles over debt talks

* C$ rises to $0.9454 vs US$, or $1.0578

* Bond prices lower, but outperform US Treasuries

TORONTO, July 25 (Reuters) - The Canadian dollar firmed against its U.S. counterpart on Monday morning after a failure to reach a deal to raise the U.S. debt ceiling weighed heavily on the U.S. dollar.

The breakdown in U.S. budget talks fueled demand for perceived safe-haven currencies, as the greenback hit a record low versus the Swiss franc and a four-month trough against the yen. [FRX/]

But the Canadian dollar -- which usually trades alongside riskier assets such as equities and commodities -- bucked the broad flight-to-safety trend, and benefited as well.

“People more and more are seeing Canada as a place where you can put money more safely,” said Charles St-Arnaud, Canadian economist and currency strategist with Nomura Securities International in New York.

“It’s mainly a flight to safety given what’s going on in the United States ... people look at the second best solution. They want a triple-A government that has a decent sized bond market.”

Most investors expect a U.S. deal will be done before the Aug. 2 deadline to avert default, but the lack of progress in talks over how to cut the budget deficit and raise the debt ceiling, heightened the possibility of a ratings downgrade of U.S. debt and weighed on risk sentiment, which analysts said would keep dogging the greenback. [nN1E76M0B0][ID:nN1E76N0CA]

At 8:11 a.m. (1211 GMT), the Canadian dollar stood at C$0.9454 to the U.S. dollar, or $1.0578, up from Friday’s North American session close of C$0.9491 to the U.S. dollar, or $1.0536.

The currency weakened on Friday after domestic inflation data came in surprisingly tame, trimming expectations that interest rates will rise later this year. [nN1E76L02X]

With no major North American data due on Monday, investors will fix their attention to any progress on the U.S. debt ceiling talks, as well as Canada’s May GDP figures on Friday.

Canadian government bond prices drifted lower, tracking the move in U.S. Treasuries. [US/]

They outperformed their U.S. counterparts across the curve, however, on investor concern that the world’s biggest economy could lose its prized top-notch credit rating.

The two-year bond CA2YT=RR was down 3 Canadian cents to yield 1.514 percent, while the 10-year bond CA10YT=RR lost 7 Canadian cents to yield 2.940 percent. (Reporting by Claire Sibonney; Editing by Theodore d'Afflisio)