* C$ closes at C$0.9886 vs US$, or $1.0115
* Bond prices mostly creep higher (Updates to close, adds details, quotes)
By Claire Sibonney
TORONTO, Feb 23 (Reuters) - Canada's commodity-driven currency was little changed against the U.S. dollar on Wednesday as investors weighed market fears over Libya's violent uprising against a surge in oil prices.
U.S. crude prices surged to a 28-month high of $100 a barrel as the revolt in OPEC producer Libya caused a cut in output there and investors bet the unrest could spread to other oil exporters in the region. [O/R]
Stronger crude prices typically help the Canadian dollar as Canada is a significant oil exporter. But rising oil prices have also fanned concerns that they could inspire inflation, which might hamper global economic recovery.
"Canada is flat. We're struggling between the jump higher in risk aversion over the last couple days versus the jump higher in oil prices," said Camilla Sutton, chief currency strategist at Scotia Capital.
U.S. stocks tumbled for a second day on Wednesday as the spike in oil drove investors to seek safer-haven assets and fueled worries of a market correction. [.N]
"Markets are really just trying to digest what higher oil prices mean," Sutton said. "Is it good for Canada in the sense that it brings in more revenues to the West and oil exporting provinces or is it actually negative in the sense that it weighs on the fragile U.S. recovery?"
The dramatic rally in oil dragged broadly on the U.S. dollar as higher energy costs tend to ripple through the economy, pushing up the costs of utilities, manufactured goods and transportation.
As investors shunned the greenback, another safe-haven currency, the Swiss franc, neared a record high, while the euro and sterling also rose on the back of heightened expectations that interest rates will rise faster in the euro zone than in the United States. [FRX/]
The Canadian dollar CAD=D4 finished at C$0.9886 to the U.S. dollar, or $1.0115, slightly up from Tuesday's North American session close at C$0.9909 to the U.S. dollar, or $1.0092. During the day, the currency slipped as low as C$0.9960 to the U.S. dollar, or $1.0040, its weakest point since Feb. 11.
Sutton said that weakness was partly driven by rumors of merger and acquisition activity that could be negative for the Canadian currency.
She said the next immediate range for the Canadian dollar should be close to Wednesday's overall move between C$0.9858 to C$0.9960.
No major Canadian data is scheduled for the rest of the week.
REAL RETURN ATTRACTS STRONG DEMAND
Canadian government bonds mostly turned higher after an early bout of profit-taking, as the turmoil in Libya fanned fears of inflation spurred by expensive oil, and its potential drag on the global recovery.
"There is residual pessimism and there's still a lot of volatility left underneath the surface and this hasn't been resolved on the geopolitical front," said David Tulk, chief macro strategist at TD Securities.
"That fear has come back to markets so you're seeing the usual dynamic where bonds are catching a bit of a bid, equities are weaker and then the fear trade is showing up in the price of oil as well."
The interest-rate sensitive two-year Canadian government bond CA2YT=RR was off 1 Canadian cent to yield 1.802 percent, but the 10-year bond CA10YT=RR gained 28 Canadian cents to yield 3.323 percent.
Canada's auction of 30-year real return bonds on Wednesday met with the strongest demand since December 2009. [ID:nN23171025]
In other debt issues, the Province of Ontario sold C$750 million in a reopening of an existing issue that was 69 basis points more than the Canadian government benchmark, according to a term sheet seen by Reuters. [ID:nN23149273] (Additional reporting by Ka Yan Ng; editing by Peter Galloway)