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By Claire Sibonney

TORONTO (Reuters) - Canada's dollar sank to a
seven-week low against the greenback Tuesday as data in
Canada and the United States sparked concern that the economic
recovery is going sour.

Canadian retail sales rose less than expected in June,
adding to mounting doubts that the Bank of Canada will continue
to raise interest rates at its recent steady clip.

In the United States, home sales data came in weaker than
expected, prompting investors to sell U.S. equities and push
Treasuries sharply higher.

After the data, the Canadian currency touched a
session low of C$1.0665 against the U.S. dollar, or 93.76 U.S.
cents, more than a penny below Monday's finish of C$1.0523 to
the U.S. dollar, or 95.03 U.S. cents.

"We've had risk appetite waning a bit, you've had oil
prices down on the day, global stock markets weaker and that's
sort of weighed on the non-U.S. dollar currencies," said
Michael Gregory, senior economist at BMO Capital Markets.

"On top of that you had the retail sales report in Canada,
which I think also added to the weight of evidence suggesting
that the Bank of Canada could very well pause (on raising rates
in September)."

Yields on overnight index swaps, which trade based on
market expectations for the central bank's Sept. 8 rate
decision, deflated to a 31 percent chance of a rate hike, as
calculated by Reuters.

The Canadian currency ended the North American session at
C$1.0603 to the U.S. dollar, or 94.31 U.S. cents.

Shaun Osborne, chief currency strategist at TD Securities,
said that if the Canadian dollar pushes through a July level of
C$1.0675, it could then weaken to C$1.0850, a level last seen
in May. He added that the currency will test support at the
C$1.05 to C$1.0550 level.

Osborne also noted that shrinking yield spreads on shorter
term debt between Canada and the United States is a negative
factor for the Canadian dollar.

The difference between Canadian and U.S. two-year bond
yields narrowed to about 70 basis points
on Tuesday, from about 100 basis points in mid-July, according
to Thomson Reuters data.

"It's quite a significant decline in rates in Canada,
reflecting, I think, the uncertainty of the policy outlook, not
specifically because of Canada ... but it's more I think a
reflection of the international environment," Osborne said.

"We would expect the Canadian dollar to react as it has to
that change in interest rate advantage."

BONDS RALLY

With disappointing North American data and the chance of
interest-rate rises fading, Canadian bonds were firmer across
the curve as investors flocked to the safety of government
debt.

Canada's two-year bond jumped 10 Canadian cents
to yield 1.203 percent, while the 10-year bond
soared 46 Canadian cents to yield 2.827 percent.

Still, Canadian bonds underperformed their U.S.
counterparts at the long end of the curve.

"You're hitting new lows on the Treasury side and Canada
jumping along with that, although lagging a little bit," said
BMO's Gregory.

"It does seem people are under belief that central banks
will be keeping their rates lower for longer. That story more
compelling on the U.S. side has provided that extra lift for
bonds, particularly for Treasuries at the expense of riskier
assets."