* Climbs as high as C$1.1019 to the U.S. dollar
* Commodity rally, risk appetite drive gains
* Bond prices turn around, end mostly higher (Updates to session close)
By Frank Pingue
TORONTO, July 20 (Reuters) - The Canadian dollar raced to its highest level against the greenback in over five weeks on Monday, thanks to an improved appetite for risk and stronger commodity prices, but it gave back a slice of its early gains ahead of Tuesday's Bank of Canada rate decision.
The rally came alongside advances in global equities, as strong U.S. corporate earnings and news that lender CIT Group Inc CIT.N was thrown a financial lifeline to avoid bankruptcy helped reinforce optimism for a global recovery.
That all helped to send the Canadian currency as high as C$1.1019 to the U.S. dollar, or 90.75 U.S. cents, which marked its highest level since June 12. The move followed last week's 4.4 percent rise in the currency.
"Problems with the economy are still prevalent but people are driving stocks upward with speculation that the economy is in the recovery stage," said Tyson Wright, a senior foreign exchange trader at Custom House, a currency services firm in British Columbia. "Therefore risk assets are in demand and the Canadian dollar is gaining on the back of that sentiment."
By the end of the session the Canadian dollar backed down to C$1.1068 to the U.S. dollar, or 90.35 U.S. cents, but was still comfortably above Friday's close of C$1.1161 to the U.S. dollar, or 89.60 U.S. cents.
Higher prices for oil and commodities, key Canadian exports, also helped lure traders to the currency.
The Canadian dollar's rise came ahead of the Bank of Canada's interest rate announcement on Tuesday, when it is expected to stick to its conditional pledge to keep rates at the current near-zero level. [ID:nN17484031]
Plenty of eyes will likely be on the bank's accompanying statement to see if it offers an updated view on the Canadian dollar. In its June statement, the bank said a strong currency could offset positive factors such as improved financial conditions and commodity prices. [ID:nN0479627]
According to RBC Capital Markets, the recent strength of the Canadian dollar is on the Bank of Canada's radar screen, but it would still need to rise much further to convince the central bank to intervene in currency markets.
"The (Bank of Canada) is likely to continue to rely on rhetoric to cap (Canadian dollar) rallies," David Watt, senior currency strategist at RBC Capital Markets, wrote in a note.
"However, if CAD maintains its momentum, short of signs of a stunning rebound in the global economy, the risk of a stronger response will increase exponentially as USD/CAD head well below C$1.10."
BONDS PRICES REBOUND
Domestic bond prices reversed an early selloff to close the session mostly higher as potential for bond-friendly remarks from central bankers convinced dealers to square positions.
In addition to Tuesday's Bank of Canada rate announcement, dealers are getting set for U.S. Federal Reserve Chairman Ben Bernanke's semi-annual testimony to Congress.
Positioning ahead of those events helped reverse an early selloff in bonds, which came on news that CIT Group may have reached a deal that could allow it to avoid bankruptcy.
That news helped initially lure investors out of government debt and and into stocks, even pushing the S&P/TSX composite index .GSPTSE briefly to its highest level since June 15.
"It seemed to be risk appetites were were building again this morning but things turned around a little bit here despite the fact that data today ... was actually a little bit better than expected," said Michael Gregory, senior economist at BMO Capital Markets.
"I suspect that what we saw here was just simply a little bit of position squaring perhaps ahead of tomorrow's policy pronouncements on both sides of the border."
Canadian data showed wholesale trade dropped in May for the eighth consecutive month to its lowest level since 2005, while a separate report showed foreigners scooped up a record C$19.38 billion worth of Canadian bonds in May. [ID:nN2079297]
The two-year Canada bond ended down 1 Canadian cent at C$100.07 to yield 1.214 percent, while the 10-year bond rose 53 Canadian cents to C$102.65 to yield 3.430 percent.
The 30-year bond rose C$1.15 to C$117.60 to yield 3.952 percent. The 30-year U.S. Treasury bond yielded 4.510 percent.
Canadian bonds outperformed their U.S. counterparts across the long end of the curve. The Canadian 30-year bond was about 56 basis points below the U.S. 30-year yield, compared with 53 basis points on Friday. (Editing by Rob Wilson)