* C$ tops 84 U.S. cents as oil jumps 5 percent
* Closes at highest level in two weeks
* Bond prices largely lower as supply expected to swell
By Jennifer Kwan
TORONTO, Jan 5 (Reuters) - The Canadian dollar firmed against the U.S. currency on Monday to close at its highest level in two weeks, helped by a rise in the price of oil as tension in the Middle East raised supply concerns.
Bonds were lower across the curve as investors' appetite for risk returned, boosting the Toronto Stock Exchange .GSPTSE to a higher close after an early retreat.
The Canadian dollar finished at C$1.1900 to the U.S. dollar, or 84.03 U.S. cents, up from Friday's close of C$1.2156 to the U.S. dollar, or 82.26 U.S. cents.
At one point the loonie hit C$1.1867 to the U.S. dollar, or 84.27 U.S. cents, its highest level since mid-December.
Oil CLc1 settled $2.47, or 5.33 percent, higher at $48.81 a barrel as Israel's ground and air assault on Gaza raised Mideast tensions and a dispute over natural gas between Russia and Ukraine fanned supply fears. [ID:nSP343684]
Fluctuations in the price of oil -- which has risen from around $35 a barrel since Israel launched its Gaza offensive on Dec. 27 --- often sway the currency as Canada is a major producer and exporter.
While higher oil prices helped the currency's rise, the firmness in the Canadian dollar was also due to "flow-driven trade," said Shaun Osborne, chief currency strategist at TD Securities.
"I don't think anyone has a very strong conviction on where these markets are going," he said. "People are keeping the powder try, if you like, until the trends become a little bit more apparent."
On Monday, the Canadian dollar traded in a range of C$1.2174 to the U.S. dollar, or 82.14 U.S. cents, to C$1.1867, or 84.27 U.S. cents, according to the Bank of Canada.
The currency has been largely rangebound in recent weeks, after falling more than 18 percent in 2008 as plunging commodity prices in the second half of the year took their toll.
BONDS MOSTLY LOWER
Government bond prices turned lower after earlier strength as the TSX rebounded to extend its gains for a fifth straight session.
With no major data in Canada on Monday, domestic bonds tracked the big U.S. Treasury market, which saw longer bonds fall on expectations of swelling supply. [ID:nN05378067]
In Canada, the prospect of increased issuance also weighed on prices, as well as the return of investors to equity markets, said Mark Chandler, fixed income strategist at RBC Capital Markets.
"The reason why bond markets have been weaker in general, as well, is that we're getting a little bit of risk appetite returning," said Chandler.
Whether that trend continues, however, remains to be seen.
The two-year bond fell 2 Canadian cents to C$102.98 to yield 1.158 percent, while the 10-year bond dropped 55 Canadian cents to C$111.10 to yield 2.892 percent.
The yield spread between the two-year and 10-year bond was 150 basis points, versus 167.5 at the previous close.
The 30-year bond fell C$2.00 to C$123.95 to yield 3.640 percent. In the United States, the 30-year treasury yielded 2.9951 percent. (Reporting by Jennifer Kwan; editing by Rob Wilson)