* C$ touches high of C$1.0562, or 94.68 U.S. cents
* Strong inflation, retail sales data boosts C$
* Bond prices mixed across curve (Recasts, adds details)
TORONTO, May 21 (Reuters) - Canada's dollar fought back from a 14-week low to hit a session high against its U.S. currency on Friday, supported by stabilizing equity markets and domestic data that kept alive the possibility of a June 1 interest rate hike.
The currency touched a high of C$1.0562 to the U.S. dollar, or 94.68 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 data that showed Canadian inflation was higher than expected in April, while retail sales in March soared from February. [ID:nN21149251] [ID:nN21207192]
"It all comes back to expectations of interest rates," said J.P. Blais, vice-president foreign exchange products at BMO Capital Markets.
"With stronger data it's giving them more reasons to hike rates, and if markets are stabilizing it's giving them the green light to hike rates, making the Canadian dollar more appealing. Hence the Canadian dollar is stronger this morning."
Inflation was higher than expected in April at 1.8 percent, up from 1.4 percent in March. The closely watched core rate jumped to 1.9 percent, nudging up against the central bank's 2 percent target. Consumers spent heavily on motor vehicles and parts in March, helping overall retail sales to jump 2.1 percent, the most in five years.
The currency also got a lift as equity markets stabilized after being pummeled in recent sessions on concern that austerity measures in euro zone countries would hurt European and global growth. [.N] [MKTS/GLOB]
"Equities were down a fair bit pre-open. The fact that they are holding pretty much unchanged it's bringing back a little more confidence in the system," Blais said.
At 11:34 a.m. (1534 GMT), the currencywas at C$1.0572 to the U.S. dollar, or 94.59 U.S. cents, up from C$1.0678, or 93.65 U.S. cents, at Thursday's close.
Despite the strong data, economists and strategists say the market is largely on edge over whether the Bank of Canada will raise interest rates at its June 1 announcement.
"It doesn't answer the question as to whether or not the Bank of Canada goes on June 1. I think that's what most traders are looking at: Is this number going to be a decisive enough reason to move on June 1?" said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"And, setting aside the other factors that are influencing the markets, being risk on, risk off, equities, uncertainties with respect to Europe, China, global growth concerns, they remain very, very much influential in what will likely be a decision that will come right down to June 1 for the Bank of Canada."
The data kept market expectations, as measured by yields on overnight index swaps, about evenly split on whether the Bank of Canada raises interest rates next month.
Market volatility arising from the European debt crisis has dramatically eroded the market's sense of pending rate increases. They were a near certainty a month ago when the central bank removed its conditional commitment to leave rates unchanged at 0.25 percent until the end of June.
Canadian bond prices were slightly weaker at the short end and firmer at the long end, which followed U.S. Treasury issues higher as investors flocked to the safety of government debt. [US/]
The two-year government bondsagged 7 Canadian cents to C$99.71 yield 1.647 percent, while the 10-year bond gained 15 Canadian cents to C$121.60 to yield 3.725 percent.
Another factor that may influence markets on Friday is liquidity, which could dry up as the Canadian bond market closes at 1 p.m. (1700 GMT) ahead of the holiday weekend. Financial markets are closed on Monday for Victoria Day. (Additional reporting by Ka Yan Ng and Claire Sibonney; editing by Rob Wilson)
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