* C$ edges up to C$1.0344 to the U.S. dollar
* Bonds rise after weaker-than-expected U.S. jobs report
* Canadian employment report disappoints (Adds details, quotes)
By Jennifer Kwan
TORONTO, Jan 8 (Reuters) - The Canadian dollar firmed against the U.S. currency on Friday morning as the greenback fell after a disappointing U.S. employment report tempered optimism about a swift economic recovery.
The market reacted negatively to the U.S. employment data, sending the U.S. dollar lower against the euro after a government report showed U.S. employers unexpectedly cut 85,000 jobs in December. [FRX/]
"It lowers the market's initial knee-jerk reaction about the possibility of rate hikes. That would soften your U.S. dollar tolerance in the very short term," said Derek Holt, economist at Scotia Capital.
At 9:22 a.m. (1422 GMT), the Canadian dollar was at C$1.0344 to the U.S. dollar, or 96.67 U.S. cents, up from Thursday's North American finish of C$1.0350 to the U.S. dollar, or 96.62 U.S. cents.
In early trading the Canadian dollar had dropped as low as C$1.0386, or 96.28 U.S. cents, after the Canadian employment report for December showed an unexpected loss of 2,600 jobs. [ID:nN08233091]
The Canadian unemployment rate held steady at 8.5 percent, as forecast in a Reuters poll. The job losses, which followed a gain of 79,000 jobs in November, are small enough to be considered a flat reading, but disappointed the market consensus for a 20,000 increase.
"The gain on employment (was) weaker than expected so likely near term to put some downward pressure on Canada as it suggests the Bank of Canada is going to be in no rush to start tightening interest rates," said Paul Ferley, assistant chief economist, Royal Bank of Canada.
Still, Holt said the broader trend is for more robust jobs growth in 2010.
"Markets are increasingly convinced that we're moving towards the next phase of recovery in both world economic growth and job markets and that's laying on a bit more risk tolerance," he said.
"I personally dismiss both of these reports as being historical artifacts as we turn the page to sustained jobs growth in 2010," Holt added.
The price of oil [O/R], a key Canadian export, slipped to around $82 a barrel, while gold prices were steady. [GOL/] Commodity prices often influence the direction of the Canadian dollar.
Canadian bond prices switched direction, turning higher after the jobs data. The move mimicked U.S. Treasuries where bonds rallied as investors pared back bets on near-term rate hikes by the U.S. Federal Reserve. [US/]
"Both countries showed modest disappointment. There was the hope that we could see yields settle down a little bit after they rose late last year, but I think markets first had to get through the payroll report," said Mark Chandler, fixed income strategist, RBC Capital Markets.
The two-year government bond CA2YT=RR rose 13 Canadian cents to C$99.87 to yield 1.320 percent, while the 30-year bond CA30YT=RR rose 45 Canadian cents to C$114.20 to yield 4.129 percent. (Additional reporting by Claire Sibonney; editing by Peter Galloway)