* C$ closes at 96.22 U.S. cents
* Currency hits highest since Aug. 20
* U.S. jobs fall less than expected
* Bank of Canada rate hike expectations rise
* Bonds prices fall after better data
(Updates to close, adds details, quotes)
TORONTO, Sept 3 (Reuters) - The Canadian dollar rallied to
a two-week high against the greenback on Friday, climbing more
than a penny, after an upside surprise in U.S. job data
increased expectations Canadian interest rates will rise next
U.S. employment fell for a third straight month in August,
but the drop was only half the anticipated loss, and private
hiring growth -- considered a better gauge of labor market
health -- beat consensus. [ID:nN02227856]
U.S. service sector activity data came in weaker than
forecast, but at a level that still qualifies as expansion
rather than contraction. [ID:nN03111828]
The data from Canada's largest trading partner drove the
as high as C$1.0384 to the U.S.
dollar, or 96.30 U.S. cents, its strongest level since Aug.
"The market really took it from a bullish point of view so
we have seen stocks rally and government bonds sell off and
we've seen generally risk currencies do fairly well," said Tom
Nakamura, fixed-income portfolio manager at AGF Investments.
In a note to clients, Doug Porter, deputy chief economist
at BMO Capital Markets, said it wasn't every day that the
market greets a "not-horrendous" jobs report with open arms.
"It's nothing to write home from summer camp about, but the
gains are consistent with an economy that is still grinding
forward," the note said.
The Canadian dollar ended the North American session at
C$1.0393 to the U.S. dollar, or 96.22 U.S. cents, up sharply
from Thursday's close at C$1.0535 to the U.S. dollar, or 94.92
U.S. cents. It gained 1.3 percent for the week.
Investors have feared sustained weakness in the United
States could spill over to Canada's economy, which has dragged
on the currency in recent weeks.
"When it looked like our major trading partner was going
into the dumps, CAD underperformed and now that it looks like
they maybe aren't going into the dumps as quickly as
anticipated, CAD is storming back," said David Watt, senior
currency strategist at RBC Capital Markets.
The Bank of Canada decides on interest rates on Sept. 8 in
one of the closer calls in some time. [CA/POLL]
Financial markets raised the probability of a hike to
nearly 63 percent from around 52 percent before the jobs data,
according to a Reuters calculation based on yields on overnight
That move allowed the currency to catch up after
underperforming earlier in the week, added AGF's Nakamura.
Higher interest rates and the expectation of higher rates,
tend to attract capital and stoke demand for a country's
With the U.S. labor market data alleviating some fears the
world's biggest economy may succumb to a double-dip recession,
U.S. Treasury prices drifted lower, pulling down Canadian
government debt prices. [US/].
Bond prices typically fall when interest rates go up as
their low-yielding fixed payments seems less lucrative compared
to rising yields on other short-term investments.
Canada's rate-sensitive two-year bond
Canadian cents to yield 1.376 percent and the 10-year issue
sank 67 Canadian cents to yield 2.946 percent.
"The market is trying to assess how likely is a double-dip
scenario, how likely is a deflationary scenario and in relation
to the U.S., how likely is it that we're going to see more
quantitative easing," said Nakamura.
"For today, it is a lower probability of those three
(Editing by Jeffrey Hodgson)