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* C$ closes at C$1.0438 to US$, 95.80 U.S. cents
* Hits high of C$1.0338 to US$, or 96.73 U.S. cents
* Canada posts historic gain in jobs in April
* Euro zone debt concerns keep C$ gains in check
* Bond prices cool off as stability returns
By Claire Sibonney
TORONTO, May 7 (Reuters) - Canada's dollar bounced back on Friday from the three-month low it hit the day before, boosted by an April jobs report that showed record gains and put more pressure on the Bank of Canada to raise interest rates soon.
Persistent fears of a market meltdown over Greece's debt crisis kept the currency's rise in check, however.
In a Reuters poll conducted after the employment figures were released, all of Canada's primary securities dealers, undaunted by Europe's fiscal crisis, said they expect the Bank of Canada to start raising interest rates in June as the economy roars ahead,. [ID:nN07180411]
All 12 dealers said the central bank would push its key interest rate 25 basis points higher from the current ultra-low 0.25 percent.
Currencies usually strengthen as interest rates rise as higher rates attract capital flows.
"It's going to take a fair bit more volatility I imagine in global markets to dissuade the money markets here from the view that the bank has to tighten rates at some point in the not-too-distant future," said Shaun Osborne, chief currency strategist at TD Securities.
"The economy appears to be firing very much on all cylinders at the moment...we're still very bullish on the medium-term outlook for the Canadian dollar and the specific short-term outlook for the Canadian dollar on the crosses."
The currency CAD=D4 rose to a session high of C$1.0338 to the U.S. dollar, or 96.73 U.S. cents, from about C$1.0448, or 95.71 U.S. cents, just before the jobs data's release.
The euro also recovered from a 14-month low against the U.S. dollar as German lawmakers approved a rescue package for Greece while the greenback gained versus the yen after U.S. data showed employment grew at its fastest pace in four years in April. [FRX/]
The Canadian currency finished the North American session at C$1.0438 to the U.S. dollar, or 95.80 U.S. cents, up from its close on Thursday of C$1.0523 to the U.S. dollar, or 95.03 U.S. cents.
The currency was down 2.8 percent for the week, the steepest weekly drop since October.
Yields on overnight index swaps, which trade based on expectations for the central bank's key policy rate, jumped on Friday, showing the market believed credit tightening was more likely after the data than before. BOCWATCH
Last month, the Bank of Canada took a first step toward tightening monetary policy by removing a commitment to keep rates at the rock-bottom 0.25 percent until the end of June.
Weighing on Canada's commodity-linked and risk-sensitive currency was oil, which fell for a fourth day in a row, tracking a steep fall in North American stock market indexes due to euro zone worries. [O/R] [.N] [.TO]
On Thursday, the Canadian dollar hit its lowest level since early February and had its steepest intraday drop since the market crash of 2008 on heightened fears that Greece's debt crisis may spread to other euro zone countries and threaten the economic recovery.
As well, Thursday's mayhem across all markets led to speculation about a massive errant trade.
"(Parity with the U.S. dollar) has been put back for quite a while, and this just goes to show how quickly these things can change," said Carlos Leitao, chief economist at Laurentian Bank of Canada in Montreal.
"I think until, and unless, there is some more encouraging news coming out of Europe, there will be downward pressure on the Canadian dollar and upward pressure on the U.S. dollar."
BOND PRICES WEAKER
Canadian government bond prices slumped across the curve, after the strong domestic jobs data hinted at a higher rate environment.
Bond prices typically fall when interest rates go up as their low-yielding fixed payments seems less lucrative compared with rising yields on other investments.
The move down also tracked U.S. Treasures, which fell as safe-haven demand for bonds cooled with some stability returning to Wall Street.
The two-year government bond CA2YT=RR slipped 5 Canadian cents to C$99.39 to yield 1.805 percent, while the 10-year bond CA10YT=RR dropped 15 Canadian cents to C$100.00 to yield 3.500 percent. (Reporting by Claire Sibonney; editing by Peter Galloway)