* C$ ends at 95.71 U.S. cents
* Bond prices turn lower as stocks rebound
* Bank of Canada raises rates, sees recovery slowing
* All Canada dealers see September rate hike, Q4 cloudy (Updates to close)
By Claire Sibonney and Ka Yan Ng
TORONTO/OTTAWA, July 20 (Reuters) - The Canadian dollar zoomed nearly a penny higher against the U.S. dollar on Tuesday, taking its cue from firming equity and commodity markets and looking past a slightly more subdued outlook on the world economy issued by the Bank of Canada.
A rise in oil prices also played a role, pushing the commodity-linked currency CAD=D4 to a session high of C$1.0435 to the U.S. dollar, or 95.83 U.S. cents. [O/R]
North American stock markets reversed losses made early in the day on disappointing U.S. housing starts data for June and weaker-than-expected revenues by IBM and Texas Instruments. [.N] [ID: nN20249501] and closed convincingly higher.
"That's put investors in a little bit better of a mood and that's what you're seeing reflected in the traditional risk trades like long Canadian dollars and maybe a bit of an uptick in bond yields," said David Tulk, senior macro strategist at TD Securities.
The Canadian dollar CAD=D4 ended at C$1.0448 to the U.S. dollar, or 95.71 U.S. cents, up from Monday's finish of C$1.0549 to the U.S. dollar, or 94.80 U.S. cents.
The currency failed to find support early in the session -- after the central bank raised interest rates 25 basis points to 0.75 percent -- largely because the bank warned the economic recovery at home and abroad will be slower than thought, foreshadowing a more hesitant pace of rate hikes from now on. [ID:nN20251478]
Canada's blistering growth rate and jobs growth had led primary securities dealers to unanimously predict Tuesday's rate hike, which put Canada leagues ahead of the U.S. Federal Reserve and other G7 central banks that are not yet ready to end the era of easy money.
"We were a bit surprised by the fact that they did not address the strength of the labor market. Actually, we are the only G7 country where the employment level is now around its pre-recession one," said Yanick Desnoyers, economist at National Bank Financial in Montreal.
"There was a lack of conviction clearly in this press release ... but we still think that domestic developments should be strong enough going forward."
Canada's primary securities dealers forecast unanimously on Tuesday that the Bank of Canada will raise interest rates for a third time this year in September, but most expect a pause in the credit tightening cycle sometime in the fourth quarter. [CA/POLL]
BOND PRICES REVERSE GAINS
Canadian government bond prices erased earlier gains as a steep late-afternoon rally in North American equities put riskier assets back in favor.
Second thoughts about the Bank of Canada's statement earlier in the day also weighed.
"Ultimately given that it wasn't as much of a deviation as maybe people had feared that when you get back to the business of the risk trade then that was a more important dynamic over the the afternoon," said TD's Tulk.
Canada's two-year bond CA2YT=RR slipped 8 Canadian cents to yield 1.578 percent, while the 10-year bond CA10YT=RR fell 30 Canadian cents to yield 3.202 percent.
Canadian bonds underperformed U.S. Treasuries across the curve. The Canadian 10-year bond was 24.8 basis points above the comparable U.S. bond, compared with 20.4 basis points in the previous session. (Editing by Peter Galloway)