* C$ hits C$1.0160 to the U.S. dollar
* Canada economy adds 21K jobs, lifts C$
* Bonds lower after data
TORONTO, March 12 (Reuters) - The Canadian dollar rose to its highest level against the U.S. currency since July 2008 on Friday after Canadian employment data came in slightly better than forecasts.
Canada's unemployment rate fell to 8.2 percent in February from 8.3 percent in January as 20,900 more people found work in the month, with all the gains coming from full-time jobs, Statistics Canada said on Friday. [ID:N12253705]
Economists surveyed by Reuters had forecast net job growth of 20,000 jobs in February and an 8.3 percent unemployment rate.
"It's a very strong labor report and dollar/Canada has broken into a new 20-month low. Considering it wasn't released on the same day as (U.S.) nonfarm (payrolls data) it could get even more attention than it usually does. All in all, it's good for the Canadian dollar," said Camilla Sutton, currency strategist at Scotia Capital.
The dollar touched C$1.0160 to the U.S. dollar, or 98.43 U.S. cents, from about C$1.0234, or 97.71 U.S. cents just before the report.
At 7:38 a.m. (1238 GMT), the Canadian dollar fell back slightly to C$1.0173 to the U.S. dollar, or 98.30 U.S., still up from C$1.0243 to the U.S. dollar, or 97.63 U.S. cents, at Thursday's close.
Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, edged higher after the report, showing the market saw tightening as slightly more likely than before the data.
The Canadian dollar has been rallying in recent weeks on expectations Canada could hike interest rates well ahead of the United States.
The market suggests there are high odds the rate, now at 0.25 percent, will be around 1 percent by October.
Bond prices were mostly lower after the domestic data, and were also affected by moves in the United States, where Treasuries prices were soft ahead of U.S. economic data due later in the session and a Federal Reserve interest rate meeting next week. [US/] (Reporting by Jennifer Kwan; Editing by Jeffrey Hodgson)
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