CANADA FX DEBT-C$ firms after BoC holds key rate

* C$ at C$1.0369 vs US$, or 96.44 U.S. cents
    * Currency boosted after BoC keeps rate hike alive
    * Bond prices mostly lower

    By Jon Cook	
    TORONTO, June 5 (Reuters) - The Canadian dollar was slightly
stronger against its U.S. counterpart on Tuesday after the Bank
of Canada held its key interest rate in check at 1 percent, but
signaled it may have to raise it later.	
    The renewed turbulence in Europe had investors keenly
interested in whether and how the Bank of Canada might temper
the language from its April 17 decision, when it said modest
withdrawal might become appropriate "in light of the reduced
slack in the economy and firmer underlying inflation."	
    On Tuesday, Canada's central bank acknowledged that the
global outlook had weakened in recent weeks due primarily to an
escalation in the European debt crisis, but it did not remove
the possibility of a rate increase further down the road should
the Canadian economy maintain its current momentum.
    In reference to language used back in April, Bank of Canada
Governor Mark Carney said "some modest withdrawal of the present
considerable monetary policy stimulus may become appropriate."	
    At 10:06 a.m. (1406 GMT), the Canadian currency was
at C$1.0369 against the U.S. dollar, or 96.44 U.S. cents, up
slightly from Monday's close at C$1.0397, versus the greenback,
or 96.18 U.S. cents.. 	
    "The market consensus was getting ahead of itself with
respect to the next move being a cut, and (Carney) successfully
scaled back those expectations," said Jack Spitz, managing
director of foreign exchange at National Bank Financial. "As a
result we've seen a move higher for the Canadian dollar."	
    The boost from the Bank of Canada announcement was pared by
lingering fears about the state of Spain's fragile banking
sector. Spain's high borrowing costs mean it is effectively shut
out of the bond market and the European Union should help Madrid
recapitalize its debt-laden banks, Treasury minister Cristobal
Montoro said on Tuesday.	
    The euro fell to a session low against the dollar and Bund
futures rose in response to Montoro's assessment. However,
Spain's stock market was up on the day and 10-year Spanish
yields were steady below 6.4 percent. 	
    "I think the vulnerability of markets and the volatility
predominately out of Europe will continue to weigh on a currency
like Canada," said Spitz, adding the Canadian dollar was not
likely to firm beyond its overnight high of C$1.0361.	
    Canadian bond markets were mostly lower. Canada's two-year
bond fell 7 Canadian cents to yield 1.007 percent,
while the benchmark 10-year bond dropped 32 cents to
yield 1.711 percent.