* C$ closes at C$1.593 per US$, or 94.40 U.S. cents
* Touches high of C$1.0551, or 94.78 U.S. cents
* Strong inflation, retail sales data boosts C$
* Canadian dealers still see June 1 rate hike
* Bond prices fall across the curve (Updates to close, adds details, quotes)
By Claire Sibonney
TORONTO, May 21 (Reuters) - Canada's dollar fought back from a 14-week low on Friday, lifted by rebounding equity markets and robust domestic data that kept alive the possibility of a June 1 interest rate increase.
The currency touched a high of C$1.0551 to the U.S. dollar, or 94.78 U.S. cents, bouncing off a low of C$1.0753 to the U.S. dollar, or 93.00 U.S. cents, its lowest level since Feb. 9.
The rally was supported by figures that showed Canadian inflation was higher than expected in April, while retail sales in March soared from February. [ID:nN21149251] [ID:nN21207192]
"From the data that came out this morning it was relatively positive in the sense that the Canadian economy seems to be humming," said Rahim Madhavji, president of Knightsbridge Foreign Exchange, a commercial foreign exchange dealer.
Madhavji said that, based on the strong inflation reading, the market has raised expectations for an interest rate hike, which would boost the Canadian currency.
"That being said, one of the things that they will continue to consider over the next week or two is the crack in the glass in Europe and how far that spreads."
All of Canada's primary securities dealers still forecast the Bank of Canada will start raising interest rates in June to cool a strong domestic economy, but they caution that the fallout from Europe's debt crisis mean a rate increase is not certain. [ID:nN21160493]
Market volatility arising from the region's sovereign debt woes and tougher financial regulation has dramatically eroded the market's sense of pending rate increases.
Central bank rate hike expectations, reflected in yields on overnight index swaps, have fallen hard from April 20 when the Bank of Canada removed its conditional commitment to hold rates until June.
At that point the market was pricing in more than a 90 percent chance of a June 1 hike, compared with about 54 percent on Friday. BOCWATCH
The Canadian dollar CAD=D4 closed the North American session at C$1.0593 to the U.S. dollar, or 94.40 U.S. cents, up from Thursday's close at C$1.0678, or 93.65 U.S. cents.
However, the currency ended the week 2.6 percent lower.
In a note to clients on Friday, RBC Capital Markets' chief technical strategist, George Davis, said the currency had to close stronger than C$1.0204 in order to end the current selloff.
The Canadian dollar also got a lift as equity markets reversed earlier losses to turn positive as worries about Europe's debt levels eased and prospects for economic recovery brightened. [ID:nSGE64K06K] [ID:nN20244272]
Both the Toronto and New York markets closed more than 1 percent higher after after being pummeled in recent sessions.
Canadian bond prices fell across the curve, as rallying equity markets, robust economic data and rate-hike expectations lured investors back to riskier assets.
Earlier in the day, bond prices rallied, even after the strong economic data.
"It was very much the fear and pain trade at the start of the day, which it's been all week," said Roger Quick, director of fixed-income research at Scotia Capital.
Once stock markets began to rebound, "that brought a little confidence back and so now the market's been trading a little bit more off the fundamentals."
The two-year government bond CA2YT=RR dropped 16 Canadian cents to C$99.62 yield 1.692 percent, while the 10-year bond CA30YT=RR sank 43 Canadian cents to C$101.14 to yield 3.365 percent.
"The fundamentals are still good for Canada and they would still suggest that the Bank of Canada is going to be raising rates," Quick added.
Bond prices tend to fall when interest rates go up as their low-yielding fixed payments seem less lucrative compared with rising yields on other investments.
Canadian bonds lagged their U.S. counterparts, with the 30-year bond 30 basis points below the U.S. 30-year yield, compared with 35 basis points below on Thursday.
The Canadian bond market closed at 1 p.m. (1700 GMT) ahead of the holiday weekend. Financial markets are closed on Monday for Victoria Day. (Additional reporting by Jennifer Kwan; editing by Rob Wilson)