* C$0.9907 to the U.S. dollar, or $1.0094
* More volatility seen on economic uncertainty
* Bond prices lower, Canada underperforms
* BoC rate views shifting; BMO, RBC see 2012 hikes (Adds analyst comments, details)
By Andrea Hopkins
TORONTO, Aug 12 (Reuters) - Canada's dollar eased slightly on Friday as unexpectedly weak U.S. consumer sentiment data kept investors nervous, capping a volatile week that saw the Canadian currency drop to below parity with the U.S. dollar.
"If your largest trading partner is suffering, it is not necessarily the best situation, so that's enough reason to stay cautious with respect to the Canadian dollar," said David Watt, senior currency strategist at Royal Bank of Canada.
A survey of U.S. consumer confidence by the University of Michigan showed sentiment fell to its lowest level since 1980, spooking investors, but a stronger-than-expected gain in retail sales excluding autos helped Wall Street stocks regain ground. [.N] [ID:N1E77B08W]
The mixed U.S. data reinforced concerns that the U.S. economy is growing only slowly, and coupled with worries about a debt contagion in Europe, suggested global stock and currency markets face a rocky road ahead.
"The market backdrop is still extremely skittish and there still is potential to have some very nervous days going forward," Watt said.
The Canadian dollar often moves in tandem with riskier assets like stocks and commodities. Toronto stocks closed little changed on Friday despite choppy trade.[.TO]
The Canadian currency CAD=D4 closed the session at C$0.9907 to the U.S. dollar, or $1.0094, slightly below C$0.9883 to the U.S. dollar, or $1.0118, at Thursday's close.
That was still well off the week's low of C$1.001 to the U.S. dollar, the first time since February that the Canadian dollar weakened below the one-for-one level with the greenback.
With some investors moving back into riskier assets, bond prices were mostly lower. Canada's two-year bond CA2YT=RR was off 4 Canadian cents to yield 0.931 percent, while the 10-year bond CA10YT=RR fell 10 Canadian cents to yield 2.469 percent.
Some Canadian bond yields hit their lowest level on record this week as stock markets initially plunged.
But Canadian bonds on Friday underperformed U.S. Treasuries, which were supported by the dismal data there. [US/]
Canadian bond prices fell even though more Canadian banks, which only last month expected the Bank of Canada to resume tightening this fall, pushed rate hike forecasts into next year. [ID:nN1E77B11K]
Canadian overnight index swaps, which are based on expectations for the Bank of Canada's key policy rate, have largely priced in a 25-basis-point rate cut by year-end. However, the odds have been pared back in recent sessions as stocks rallied. BOCWATCH
"I don't think the market pricing is wildly unreasonable. There is a far outside risk that the bank could cut in a real emergency whereas it's very tough to see them raising rates," said Doug Porter, deputy chief economist at BMO Capital Markets.
Porter said the Bank of Canada will likely remain on the sidelines until the second quarter next year, and then raise once per quarter in 2012.
RBC Capital Markets said in a report on Thursday that, based on current conditions, the priced-in rate cuts appear "wholly unjustified." It also forecast the Bank of Canada will delay its first rate hike until the second quarter of 2012.
Watt said they'd previously forecast rate hikes in September 2011.
"We think that both the market conditions and economic backdrop are going to remain uncertain for some time," he said. (Additional reporting by Ka Yan Ng; Editing by Jeffrey Hodgson)