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* C$ hits 85.92 US cents, lowest level in over 5 weeks
* Bonds rise after U.S. data
* U.S. 1st qtr GDP contracts less, jobless claims up (Adds details)
By Ka Yan Ng
TORONTO, June 25 (Reuters) - The Canadian dollar fell versus the U.S. dollar on Thursday morning, pulled lower by an unexpected rise in U.S. jobless claims, but firmer oil prices cushioned the fall.
At one point, the Canadian currency fell as low as C$1.1639 to the U.S. dollar, or 85.92 U.S. cents, its lowest level since May 18, before paring losses as the price of oil, a key Canadian export, rose more than 1 percent above $69 a barrel.
U.S. data showed the economy shrank slightly less in early 2009 than previously thought, but initial claims for state unemployment insurance for the week increased by 15,000 to a greater-than-expected seasonally adjusted 627,000. [ID:nN25258161] [ID:nN25258015]
"The key release was the claims data, which didn't show as great an improvement as expected," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
"The Canadian dollar is showing a little bit of strength from first thing this morning despite the claims number, but we're seeing some recovery in oil prices."
Also softening the decline was a firmer tone to Toronto's main stock index. [ID:nTOR004696] Typically, equity markets are seen as a gauge of investors' risk appetite.
At 10:05 a.m. (1405 GMT), the Canadian dollar was at C$1.1593 to the U.S. dollar, or 86.26 U.S. cents, down from C$1.1525 to the U.S. dollar, or 86.77 U.S. cents, at Wednesday's close.
The Canadian dollar's fall extended the descent it started on Wednesday, when the U.S. Federal Reserve said it would keep interest rates unchanged and removed from its statement a reference pointing to its concern that inflation could run below desired levels.
Other factors pressuring the currency were stop loss orders and a market that was less liquid than usual, said Firas Askari, head of foreign exchange trading at BMO Capital Markets.
"I think the Canada (dollar) just has some weak Canadian dollar longs that are getting stopped out," he said.
Canadian bond prices were higher across the curve, following their U.S. counterparts after investors digested the implications of the Fed's latest policy meeting and eyed a seven-year note auction later in the session. [ID:nLP074805]
The U.S. claims data also lifted bonds.
"What you're seeing is a little bit more caution in terms of the rebound of the U.S. economy. With that we're seeing a little bit of pressure on yields," Ferley said.
The benchmark two-year government bond rose 7 Canadian cents to C$100.03 to yield 1.234 percent, while the 10-year bond gained 45 Canadian cents to C$102.85 to yield 3.409 percent.
The 30-year bond climbed 60 Canadian cents to C$118.90 to yield 3.885 percent. The comparable U.S. issue yielded 4.449 percent. (Additional reporting by Jennifer Kwan; editing by Peter Galloway)