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* C$ at C$0.9871 versus US$, or $1.0131
* Strong Canada jobs data boosts currency
* Subdued hiring in U.S. limits gains
* C$ gains 1 pct for week
By Alastair Sharp
TORONTO, Jan 4 (Reuters) - The Canadian dollar gained sharply against its U.S. counterpart on Friday after Canada added a surprisingly robust 39,800 jobs in December, but the stronger move was hindered by a relatively subdued rate of hiring in the United States.
The positive shock of the Canadian employment data in the morning caused an immediate reaction, which was moderated somewhat in afternoon trade.
"A lot of people were caught flat-footed and you did see quite a bit of stop-loss selling of (U.S. dollars)," said Blake Jespersen, a managing director for foreign exchange sales at BMO Capital Markets.
"You're starting to see it trade back a little bit higher as some (U.S. dollar) buyers come in, some value players and some Canadian corporates looking to lock in at a decent level."
The Canadian dollar ended trade at C$0.9871 to the greenback, or $1.0131, compared with C$0.9880, or $1.0121, at Thursday's North American close. It touched C$0.9848 at one point soon after the jobs data were released.
The close resulted in a 1 percent gain for the week, according to Thomson Reuters data. The currency hit a 5-week low last Friday while U.S. lawmakers were still shy of an agreement to avoid fiscal calamity.
Jesperson said Canada's currency would likely keep bottoming out in the mid-98 range as U.S.-dollar buyers emerge at that price.
Canada defied expectations with the outsized employment gains, all of which came in full-time jobs and mostly in the private sector.
Meanwhile, the pace of hiring by U.S. employers eased slightly last month.
But despite the strong Canada jobs data, the third such outsized gain in four months, doubts remained over whether such growth was sustainable in the face of slower economic growth.
A Reuters poll published earlier on Friday pointed to headwinds for the Canadian dollar in the near term before some strengthening to trade at C$0.98 in three, six and twelve months.
"As good as these numbers were, and have been over the last couple of months, there is still a sense that the levitation act on jobs can't continue for much longer," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.
Canada has notched subdued inflation and gross domestic product data in recent months, complicating the central bank's stated aim of eventually raising interest rates.
Still, overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders increased bets on a rate hike in late 2013 after the employment reports.
The spread between yields on Canadian and U.S. government debt widened across most of the curve after the data, as traders priced in the increased likelihood of a Bank of Canada rate hike.
The two-year Canadian bond slipped 4 Canadian cents to yield 1.207 percent, and the benchmark 10-year bond fell 12 Canadian cents to yield 1.941 percent.