* C$ finishes at C$1.0865 to the U.S. dollar
* Rallies after Bank of Canada's Monetary Policy Report
* Bank says economy to emerge from recession this quarter
* Bond prices lower across the curve (Updates to finish, adds details, quotes)
By Jennifer Kwan
TORONTO, July 23 (Reuters) - The Canadian dollar rose to its highest level in seven weeks on Thursday, as equity markets rallied on hopes for a global economic recovery and after the central bank said Canada's economy will pull out of recession this quarter.
The Bank of Canada, in its Monetary Policy Report, also said the world economy has likely averted a worst-case scenario and is bottoming out. [ID:nN23196742]
Following the report, the Canadian dollar rose as high as C$1.0841 to the U.S. dollar, or 92.24 U.S. cents, its highest level since June 3.
"The stunning part of the report was the forecast," said Andrew Pyle, a wealth advisor at Scotia McLeod.
"The shift in the bank's forecast in terms of calling an end to the recession, it definitely took the currency market by surprise."
As well, the market was somewhat reassured after the central bank highlighted that the rise in the Canadian dollar has been primarily driven by higher commodity prices and general weakening in the U.S. dollar.
The Canadian dollar finished at C$1.0865 to the U.S. dollar, or 92.04 U.S. cents, up from C$1.0985 to the U.S. dollar, or 91.03 U.S. cents, at Wednesday's close.
The bank had earlier stated that the rise in the currency could effectively fully offset any improvement in the economy, but that position appears to have eased, said Peter Buchanan, senior economist at CIBC World Markets.
"It (the Bank of Canada) doesn't see it as an absolute road block in the sense that it did a few months ago," he said.
He added the market is "scaling back its assessment of the odds of further stimulative policies," which is also helping to boost the Canadian dollar.
However, Bank of Canada Governor Mark Carney warned of a long, drawn-out healing process with continued job losses. He said the bank stands ready to take further action to stimulate the economy, especially if a stronger dollar threatens to impede growth.
The central bank's report coincided with global optimism on Thursday that saw the Dow industrials .DJI vault above the 9,000 level for the first time since January, as corporate results and improving home sales data helped fuel hope about recovery. Toronto's main stock index .GSPTSE rallied to a near six-week high.
The price of oil CLc1, a key Canadian export, rose to a three-week high above $67 a barrel. [ID:nSIN419483]
BOND PRICES MOVE LOWER
Canadian bond prices were lower across the curve as money flowed out of safer government debt and into equities, following the bigger U.S. Treasury bond market where prices also fell on rallying stocks. [ID:nN23437030]
"The Canadian market is pulled along considerably by the U.S.," said Buchanan.
"In part it's the rally in the equity market and also the reduction in risk aversion."
The two-year Canada bond was down 21 Canadian cents at C$99.88 to yield 1.318 percent, while the 10-year bond dropped 80 Canadian cents to C$101.70 to yield 3.5213 percent.
The 30-year bond pulled back 70 Canadian cents to C$115.70 to yield 4.054 percent. In the United States, the 30-year Treasury yielded 4.5740 percent.
Canadian bonds mostly outperformed their U.S. counterparts. The Canadian 30-year bond was 52 basis points below the U.S. 30-year yield, compared with about 43 basis points below on Wednesday. (Reporting by Jennifer Kwan; Editing by Jeffrey Hodgson)