By Claire Sibonney
TORONTO, May 29 (Reuters) - The Canadian dollar backed off from a one-week high against its U.S. counterpart on Tuesday as worries over Spain's escalating borrowing costs and its weakening banking sector offset hopes that China may soon unveil more spending measures to support flagging growth.
Worries about the cost of shoring up Spain's banks kept Spanish debt yields elevated while the gap between them and German 10-year yields remained near euro-era highs, as the risk grew that Spain may be forced to seek an international bailout.
"The main thing on my mind this morning continues to be Europe ... certainly a lot of news out of Spain, I think that's continuing to roil the markets a little bit," said Steve Butler, director of foreign exchange trading at Scotiabank.
"I still think that overall, we'll see more U.S. dollar strength as the market continues to worry." At 8:05 a.m. (1205 GMT), the Canadian dollar stood at C$1.0249 versus the U.S. dollar, or 97.57 U.S. cents, down from Monday's North American session finish at C$1.0238 versus the U.S. dollar, or 97.68 U.S. cents.
Earlier, the currency was as firm as C$1.0208, or 97.96 U.S. cents, its strongest level since May 22 as investors reacted enthusiastically to reports of possible new stimulus from China.
Chinese media reported that the government might pump as much as 2 trillion yuan ($315.28 billion) into the economy this year, although this would be well below 4 trillion yuan ($635 billion) of stimulus it did in the wake of the 2008-09 global financial crisis.
As well, the official Shanghai Securities News said China's biggest banks appeared to have accelerated lending toward the end of this month as Beijing starts to fast track its approval of infrastructure investments. "There were rumors about a possible stimulus package in China and I think ... the market got maybe a little carried away," said Butler, noting resistance for the Canadian dollar around C$1.0210. He said investors would be looking toward C$1.0180 for an ideal place to buy more U.S. dollars and C$1.03 as an area to sell.
Later Tuesday, investors will keep a close eye on the data from the United States, including S&P/Case Shiller Home Price Index for March at 9 a.m.
Later in the week, the all-important U.S. jobs report, Canadian growth numbers, and an Irish vote on the European Union's new fiscal treaty will provide further direction.
Canadian government bond prices ticked up across the curve, mimicking U.S. Treasury prices. Canada's two-year bond added 3 Canadian cents to yield 1.077 percent, while the benchmark 10-year bond gained 27 Canadian cents to yield 1.814 percent.
(Editing by Padraic Cassidy)
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