CANADA FX DEBT-C$ hits highest level since 2007 on US$ woes

* C$ finishes at C$0.9428 vs US$, or $1.0607

* Bond prices rally, long end lags U.S. Treasuries

TORONTO, July 26 (Reuters) - The Canadian dollar rose to its best level in more than three and a half years against the U.S. currency on Tuesday, as debt fears in the United States continued to slam the greenback.

The Canadian currency CAD=D4 climbed as high as C$0.9407 to the U.S. dollar, or $1.0630. This was its strongest level since November 2007, when it hit a modern-day high.

The U.S. dollar skidded broadly as U.S. lawmakers showed no sign of reaching a compromise that would enable the debt ceiling to be raised, fanning default fears and dimming the greenback’s prospects. [FRX/]

“The usual focus on the U.S. debt ceiling talks has really driven the markets today,” said Shaun Osborne, chief currency strategist at TD Securities.

“It is not entirely clear whether we’re going to get an agreement and, if we get an agreement, what the markets will make of it. And it is just the uncertainty of the situation that is really weighing on investors’ sentiment.”

The Canadian dollar CAD=D4 finished the session at C$0.9428 to the U.S. currency, or $1.0607, up from Monday's North American close at C$0.9458 to the U.S. dollar, or $1.0573.

In recent weeks analysts have said Canada is increasingly being viewed by global investors as a safe haven, valued for its political stability, solid central bank and relatively healthy finances, in addition to its resource base.

Commodity prices such as oil also rallied on a weaker U.S. dollar. The Canadian currency often moves in tandem with commodity prices because Canada is a major exporter of natural resources.

Still, Osborne noted the Canadian dollar underperformed other commodity-linked currencies, like those of Sweden, Norway and Australia.

Canadian government bond prices rallied, taking their cue from U.S. Treasuries, which gained as U.S. stock market declines renewed the safe-haven bid for bonds, despite nagging worries over a possible U.S. default. [US/]

The two-year Canadian government bond CA2YT=RR rose 4.5 Canadian cents to yield 1.483 percent, while the 10-year bond CA10YT=RR rose 33 Canadian cents to yield 2.894 percent.

Canadian bonds broke with their recent trend and underperformed at the long end. The Canadian 10-year yield was 6.1 basis points below its U.S. counterpart, compared with 7.2 basis points below on Monday. (Editing by Jeffrey Hodgson and Rob Wilson)