* Canadian dollar's three-session win streak snapped
* Drop in currency came despite surge in oil prices
* Bonds get boost at short end on interest rate outlook
By Frank Pingue
TORONTO, June 26 (Reuters) - The Canadian dollar closed lower alongside a weaker U.S. dollar on Thursday as a sell North America sentiment that spread into equities dominated the market even though oil prices surged to a record high.
Canadian bond prices finished mostly higher as concerns about financial-services companies and pared down expectations for U.S. interest rate hikes sparked a bid for government debt.
The Canadian dollar closed at C$1.0131 to the U.S. dollar, or 98.71 U.S. cents, down from C$1.0107 to the U.S. dollar, or 98.94 U.S. cents, at Wednesday's close.
Since oil prices hit a record above $140 a barrel during the session, some traders thought the commodity-linked Canadian dollar would have been given a boost since oil is a major Canadian export and often influences the currency.
"Why isn't it stronger?" asked Steve Butler, director of foreign exchange at Scotia Capital. "The Canadian dollar should be at parity (with the U.S. dollar) given oil has cracked $140. It should be, but it's not."
Butler suggested market participants had been banking on a better performance for the Canadian dollar during the latest session, but when it didn't follow oil prices higher short-covering set in.
The currency's slide came alongside a 1 percent drop in the Toronto Stock Exchange's main index and a 3 percent slide in the Dow Jones industrial average.
Moves in the Canadian dollar this week have been contained to a tight range that is not expected to change ahead of the weekend as the only economic figures out in Canada on Friday are the industrial product and raw materials indexes for May.
Even a statement from the U.S. Federal Reserve this week that persuaded the market to scale back calls for aggressive U.S. rate hikes only had a mild boost for the Canadian dollar.
"We haven't seen any data this week but it certainly feels like things are slowing down and I just get the feeling that the market is on the defensive here in North America for awhile," Butler said.
During the first half of the session the Canadian dollar rose to C$1.0082 to the U.S. dollar, or 99.19 U.S. cents, its highest level in three weeks, before trickling to a session low of C$1.0133 to the U.S dollar, or 98.69 U.S. cents, just before the close.
BONDS EDGE HIGHER
Canadian bond prices finished mostly higher due to fresh concerns about the health of financial-services companies, which sent dealers flocking into secure assets such as government debt.
The concerns surfaced after investment bank Goldman Sachs said Citigroup and Merrill Lynch & Co could each take more writedowns in the second quarter.
That news followed comments from the U.S. Federal Reserve on Wednesday that were not as hawkish as anticipated and reduced expectations for rate hikes any time soon.
"Obviously we're getting a little bit of a limited positive spillover from the U.S. today with dimming expectations for Fed rate hikes," said Michael Gregory, senior economist at BMO Capital Markets.
The two-year bond rose 14 Canadian cents to C$101.11 to yield 3.151 percent. The 10-year bond climbed 3 Canadian cents to C$102.21 to yield 3.706 percent.
The yield spread between the two-year and 10-year bond was 55.5 basis points, up from 48.0 at the previous close.
The 30-year bond fell 44 Canadian cents to C$115.53 for a yield of 4.080 percent. In the United States, the 30-year Treasury yielded 4.607 percent.
The three-month when-issued T-bill yielded 2.60 percent, down from 2.68 percent at the previous close. (Reporting by Frank Pingue; Editing bt Peter Galloway)