* C$ reverses losses, catches up with riskier currencies
* Risk appetite returning on stimulus hopes
* Canada job loss 129K in January, worst month on record (Updates to close)
By Ka Yan Ng
TORONTO, Feb 6 (Reuters) - Canada's dollar reversed course to finish higher versus the U.S. currency on Friday as risk appetite returned to the market, overcoming the fallout from Canadian jobless numbers that were the worst on record.
The Canadian currency finished at C$1.2225 to the U.S. dollar, or 81.79 U.S. cents, up 0.7 percent from C$1.2310 to the U.S. dollar, or 81.23 U.S. cents, at Thursday's close.
Earlier in the day, the currency slumped to a two-week low of C$1.2540, or 79.74 U.S. cents, after Statistics Canada said the country suffered its worst job losses in more than three decades in January.
But there was no momentum behind the currency's move beyond C$1.25, analysts said, partly because risk appetite was making a comeback, lifting stocks, as the worst U.S. unemployment data in decades boosted political pressure for a economic stimulus deal to be passed.
"If we can't make a new low for the Canadian dollar on the back of the worst employment numbers in history, it suggests to me that the Canadian dollar isn't going to fall that much more at the moment," said Shaun Osborne, chief currency strategist at TD Securities.
"Risk appetite is increasing as the markets speculate on the prospects of stimulus measures coming out of the U.S. and other measures to help free up credit."
For the week, the Canadian dollar rose 0.3 percent.
A Statistics Canada report showed employers cut a record 129,000 jobs in January and pushed the unemployment rate to 7.2 percent from 6.6 percent in December. Analysts had forecast job losses of 40,000 and an unemployment rate of 6.8 percent, according to a Reuters poll. [ID:nN06253705]
Other high yielding currencies, such as the Australian and New Zealand dollars, also rose.
Canadian bond prices rallied on the short end of the curve as the jobs data increased speculation that the Bank of Canada will cut its key interest rate below the current 50-year low of 1.00 percent in March.
The central bank has already lowered its key overnight rate by 350 basis points since December 2007, but many experts say there is more easing still to come.
"The short end was supported by expectations the Bank of Canada will ease after that horrible jobs report," said Sal Guatieri, senior economist at BMO Capital Markets. "But the long end followed the U.S. (Treasury market) in sympathy given the shift back into (stock) markets today."
North American equities rallied on hopes that Washington's stimulus package and a U.S. bank rescue plan will bolster the ailing U.S. economy, lessening the appeal for bonds at the long end of the curve.
Toronto's key stock index closed 1.66 percent higher while the Dow Jones industrial average rallied 2.7 percent.
The interest-rate sensitive two-year bond rose 16 Canadian cents to C$102.86 to yield 1.145 percent, extending the previous session's gains, while the 10-year bond shed 20 Canadian cents to C$109.70 to yield 3.045 percent.
The 30-year bond dropped 90 Canadian cents to C$121.25 to yield 3.772 percent. In the United States, the 30-year Treasury yielded 3.696 percent. (Additional reporting by Frank Pingue; editing by Peter Galloway)