* C$ edges higher to close at 79.80 U.S. cents
* Rebounds from retreat in previous session
* Greenback relinquished some safe-haven flows
* Bond prices end narrowly mixed across the curve (Recasts with comments and closing numbers)
By Frank Pingue
TORONTO, Feb 26 (Reuters) - The Canadian dollar closed higher on Thursday thanks to a combination of higher oil prices, upbeat earnings from domestic banks and a U.S. budget that calmed safe-haven flows to the greenback.
Three of Canada's largest banks reported quarterly earnings that, excluding one-time items, topped expectations and showed that profits at domestic banks have been less damaged by the financial crisis than U.S. lenders. [ID:nN26542233]
"You've had good reports from a couple of Canadian banks that topped earnings estimates which suggests that the Canadian banking sector isn't nearly in the dire straits that the U.S. (banking sector) is," said Charmaine Buskas, senior economics strategist ad TD Securities.
"At the same time, you've had oil post a modest rally which we haven't seen in a while so that's also good news for the Canadian dollar."
The currency closed at C$1.2532 to the U.S. dollar, or 79.80 U.S. cents, up from its Wednesday close of C$1.2546 to the U.S. dollar, or 79.71 U.S. cents.
Early in the session the currency had rallied as high as C$1.2395 to the U.S. dollar, or 80.68 U.S. cents, which made it the best-performing currency versus all the majors, and allowed it to temporarily recoup all of Wednesday's drop.
But just like it has in recent sessions, Canada's dollar ended little changed from the previous session's close.
That early gain was aided somewhat by a sharp turn lower in the U.S. dollar after data showed the number of U.S. workers continuing to claim jobless benefits hit a fresh record in the second week of February. [ID:nN26542699]
A 6 percent jump in U.S. oil prices to above $45 a barrel was the key driver of the Canadian dollar since oil is a key Canadian commodity and export.
Buskas also said the U.S. dollar relinquished some of the safe haven flows it has recently attracted as U.S. President Barack Obama unveiled a $3.55 trillion budget proposal, leaving investors more comfortable that the U.S. economy will get the support it needs going forward.
Canadian bond prices were narrowly mixed across the curve as demand for more secure assets like government debt has eased in recent sessions, but the shorter-dated bonds drew modest interest ahead of some key domestic data.
The next data due out in Canada will be Friday's current account balance for the fourth quarter, which is expected to show a deficit of C$4.85 billion.
That report will be followed by the more closely watched gross domestic product figures on Monday, which are expected to show the economy shrank in the fourth quarter of 2008.
"It looks like most people are bracing for a pretty bad fourth quarter (GDP) number for Canada," said Sal Guatieri, senior economist at BMO Capital Markets. "The writing is on the wall, given the dismal monthly indicators that have come out."
That will be followed by the Bank of Canada's interest rate announcement on March 3. A Reuters poll conducted on Thursday showed most primary securities dealers expect the bank to cut its key interest rate next week. [ID:nTOR004250]
The interest-rate sensitive two-year bond rose 7 Canadian cents to C$102.65 to yield 1.215 percent, while the 10-year bond rose 1 Canadian cent to C$105.20 to yield 3.151 percent.
The 30-year bond shed 45 Canadian cents to C$122.45 to yield 3.710.
Canadian bonds outperformed U.S. treasuries across most of the curve. The Canadian 30-year bond yield was about 3.00 basis points above its U.S. counterpart, compared with 9.60 basis points on Wednesday.