CANADA FX DEBT-C$ weakens as U.S. data spurs greenback rally

* C$ lower at 94.35 U.S. cents

* U.S. retail, sentiment data spur broad-based US$ rally

* Canada bond prices fall, but outperform Treasuries

* Canada Housing Trust prices C$6.5 bln of bonds (Recasts, adds quotes)

By Jeffrey Hodgson

TORONTO, Dec 11 (Reuters) - The Canadian dollar fell almost one U.S. cent on Friday as the greenback rallied against a range of currencies on a rise in expectations that U.S. interest rates could rise sooner than had been thought.

The U.S. dollar rally was triggered by reports showing the largest advance in U.S. retail sales since August and a sharp improvement in consumer sentiment, raising hopes a self-sustaining economic recovery is under way. [ID:nN11254372]

The resurgent greenback also contributed to weaker prices for commodities such as oil and gold, key Canadian exports that heavily influence demand for the domestic currency. [O/R] [GOL/]

The Canadian dollar "should over time be strengthening, but if there's a veritable tsunami of U.S. dollar short-covering it's likely to filter into Canada as well. And that's what's we've seen today, pretty well all day." said Jack Spitz, managing director of foreign exchange at National Bank Financial in Toronto.

Many market players have been shorting the U.S. currency -- borrowing dollars and selling them in exchange for other currencies -- in expectation that rock-bottom U.S. interest rates and other factors would weaken the greenback over time.

Higher rates will often strengthen a currency by attracting foreign capital.

"It's starting to look like strong U.S. data is good for the (U.S.) dollar. Certainly the market reacted quickly and bought dollars," said Steve Butler, director of foreign exchange trading at Scotia Capital.

"The sentiment has turned in favor of the U.S. dollar and Canada's is weakening off on the back of that."

The Canadian dollar closed at C$1.0599 to the U.S. dollar, or 94.35 U.S. cents, down from C$1.0504 to the U.S. dollar, or 95.20 U.S. cents, on Thursday.

National's Spitz noted the Canadian dollar had weakened less against the greenback than many of its global peers because the Canadian economy could also benefit if a U.S. recovery is firmly under way.

Canadian data out on Friday showed new home prices rose 0.3 percent in October from September, the fourth consecutive gain, as record low interest rates and a recovering economy spurred demand. The report had limited market impact. [ID:nN114432]

BONDS LOWER

Canadian government bond prices followed their U.S. peers lower across the curve, as the strong U.S. data undermined the safe haven appeal of Treasuries.

The two-year Canadian government bond fell 4.5 Canadian cents to C$100.02 to yield 1.24 percent. The 10-year bond fell 20 Canadian cents to C$102.95 to yield 3.383 percent.

But Canadian bonds generally outperformed, with the Canadian 10-year yield falling to 15.7 basis points below its U.S. counterpart from 14.8 basis points the previous session.

In new issue news, Canada Housing Trust priced C$6.5 billion of bonds due 2015. [CAN-TNC] (Editing by Peter Galloway)