* C$ touches high of 96.06 U.S. cents
* Currency strongest since Aug. 20
* U.S. jobs numbers fall less than expected
* Bank of Canada rate hike expectations rise
* Bonds prices extend losses after data (Updates with analyst comment, U.S. jobs data)
By Claire Sibonney
TORONTO, Sept 3 (Reuters) - The Canadian dollar rallied against the greenback on Friday, climbing by more than a penny to reach a two-week high after an upside surprise in monthly U.S. nonfarm payroll numbers.
U.S. employment fell for a third straight month in August, but declined only about half as much as anticipated, and private payrolls growth surprised on the upside, easing pressure on the Federal Reserve to prop up growth. [ID:nN02227856]
In response, the Canadian dollar CAD=D4 firmed to C$1.0410 to the U.S. dollar, or 96.06 U.S. cents, compared with Thursday's close at C$1.0535 to the U.S. dollar, or 94.92 U.S. cents. The currency had traded weaker before the report.
"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.
BONDS YIELDS, RATE EXPECATIONS JUMP
The jobs data also fed into Canadian interest rate expectations as a sputtering U.S. economy has been a top concern. Investors have feared sustained weakness in the United States would spill over to Canada's economy.
The Bank of Canada decides on interest rates on Sept. 8 and it is one of the closest calls in some time. [CA/POLL] [ID:nN01259189]
The market raised the probability of a hike to more than 62 percent from around 52 percent before the data was released, according to a Reuters calculation based on yields on overnight index swaps. BOCWATCH
Higher interest rates, or the expectation of higher rates, tend to attract capital and stoke demand for a country's currency.
"I think we'll have the Bank of Canada raising rates but still sounding exceptionally cautious," added Watt.
"It would have had to have been a stunningly weak number to knock the Bank of Canada off raising interest rates."
Following the better than expected jobs data, Canadian bonds extended losses, tracking U.S. Treasuries lower. [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 CA2YT=RR shed 18 Canadian cents to yield 1.376 percent, up from 1.302 percent before the data.
The 10-year issue CA10YT=RR sank C$1.22 to yield 3.010 percent, up from 2.897 percent before the U.S. jobs report. (Editing by Jeffrey Hodgson)