* C$ closes up at 95.24 U.S. cents
* Oil tops $74 on equity rebound
* Bond prices sink across the curve
* Reuters poll calls for June rate hike (Updates to close; adds details, quotes)
By Claire Sibonney
TORONTO, May 27 (Reuters) - The Canadian dollar surged to its highest level in a week against the U.S. currency on Thursday as relieved investors returned to riskier assets after China said Europe remains a key market for its foreign exchange reserves.
The Canadian dollar shot up almost 2 U.S. cents, or nearly 2 percent, to hit a session high of C$1.0487 to the U.S. dollar, or 95.36 U.S. cents, as oil topped $74 a barrel and global stocks rallied sharply. [O/R] [.N] [.TO]
"I think what we've seen is a dramatic reversal in risk sentiment, triggered in large part by the denial of Chinese officials overnight of the rumors that they were divesting themselves of euro-denominated assets," said Millan Mulraine, economics strategist at TD Securities.
"That certainly helped the shift that we saw beginning yesterday, with investors getting a better flavor for increasing their appetite for risk."
As a result, the euro, which in recent weeks has become a proxy for risk appetite, surged across the board on the comments from Beijing. [FRX/] [ID:nTOE64Q04P]
The Canadian dollar CAD=D4 closed the North American session at C$1.0500 to the U.S. dollar, or 95.24 U.S. cents, decidedly higher than Wednesday's close at C$1.0686 to the U.S. dollar, or 93.58 U.S. cents.
Also buoying sentiment for the currency were rising expectations that the Bank of Canada will hike rates on June 1, with the market pricing in more than a 70 percent chance on Thursday afternoon, compared with only about a 50 percent chance on Wednesday. [BOCWATCH]
In a Reuters poll released Thursday, all of Canada's primary securities dealers and most other global forecasters predicted the Bank of Canada will start raising interest rates next week as the economy roars ahead. [ID:nTOR007523]
"Our view is that they do hike rates because the Bank of Canada has made it very, very clear that they don't lose focus, and they focus on fundamentals, namely inflation," said Camilla Sutton, a currency strategist at Scotia Capital.
"That should help the Canadian dollar leading into it."
Sutton said further support for the currency will be met at the 200-day moving average of C$1.0479.
BOND PRICES PLUNGE
Canadian bonds sank across the curve, tracking U.S. Treasury notes, as renewed risk appetite dulled the traditional safe-haven appeal of government debt. [US/]
The two-year government bond CA2YT=RR dropped 33 Canadian cents to C$99.42 to yield 1.796 percent, and the 10-year bond CA10YT=RR plunged C$1.03 to C$101.05 to yield 3.375 percent.
With a rate hike still being priced in the near term, Canadian bonds lagged U.S. treasuries at the short end of the curve but outperformed at the long end.
Bond prices, particularly for near-term issues, typically fall when interest rates go up as their fixed coupon payments seem less profitable than rising yields on other investments.
"Treasuries have rallied aggressively, they outperformed Canadian bonds on the way up and now we're seeing a bit of a reversal," added Mulraine.
The Canadian 10-year bond was 2.7 basis points above the U.S. 10-year yield, compared with 6.3 basis points above on Wednesday.
In new issues, Ontario sold C$600 million of debt in a reopening of an existing 4.60 percent bond, while Quebec sold C$500 million of debt in a reopening of an existing 5.00 percent issue. [ID:nN27266731] [ID:nN27269894] (Reporting by Claire Sibonney; editing by Rob Wilson)