CANADA FX DEBT-C$ rallies to 8-week high, helped by U.S. data

* C$ closes at C$0.9587, or $1.0431

* Optimism grows with U.S. jobs data, Trichet comments

* Commodity prices help drive gains

* Bonds mostly weaker, Canada outperforms

By Trish Nixon

TORONTO, July 7 (Reuters) - Canada’s dollar strengthened against the greenback on Thursday, touching its highest level in more than eight weeks, as risk appetite improved on encouraging U.S. employment data and euro zone developments.

A sharp rise in U.S. private-sector jobs raised expectations that Friday’s government report on June payrolls will provide more evidence of an improving labor market. [ID:nN1E7660BF]

Separately, European Central Bank President Jean-Claude Trichet said the bank would relax rules and keep providing liquidity to struggling Portugal, allaying worries about Europe’s debt crisis. [ID:nLDE7660BO]

“The market took the comments from Trichet earlier as being positive, so it’s more of a risk-on kind of atmosphere,” said David Bradley, director of foreign exchange trading at Scotia Capital.

“Obviously markets are going to interpret (the U.S. data) as meaning the non-farm (payroll) numbers are going to be stronger tomorrow ... generally in a risk-on environment the (U.S.) dollar is sold off, which is what happened today.”

Canada’s commodity-linked currency also benefited from the resulting rise in natural resource prices, with oil, gold and copper all rising. [O/R] [MET/L] [GOL/]

The Canadian dollar’s jump ended a 3-day slide. It finishing at C$0.9587 to the U.S. dollar, or $1.0431, up from Wednesday’s finish at C$0.9656, or $1.0356.

Earlier, the currency climbed as high as C$0.9569, or $1.0450, its strongest level since May 11.

“A lot of people are kind of scratching their heads, wondering why the Canadian dollar has appreciated so much in the last week and a half given that we were in a 99 handle and so many people were calling for it to break parity,” said Bradley.

He noted that easing fears about Europe’s debt crisis, higher bond yields and rebounds in commodity prices have all supported the gains. He expected the currency to keeping within a C$0.95 to C$0.99 range over the next quarter.

Investors will focus tomorrow on the release of employment data on both sides of the border. [ID:nN1E75T1IB]

Higher-than-expected Canadian and U.S. jobs growth could provide further support for the Canadian dollar. But Bradley said that unless the number was well above expectations, the Canadian dollar would struggle to strengthen beyond C$0.9550.

Canadian bond prices were mostly weaker as many investors moved back into riskier assets.

The two-year bond CA2YT=RR was down 8 Canadian cents to yield 1.578 percent, while the 10-year bond CA10YT=RR fell 16 Canadian cents to yield 3.064 percent.

Canadian bonds mostly outperformed U.S. Treasuries, with the Canadian 10-year yield 8.5 basis points below its U.S. counterpart, compared with 6.4 basis points in the previous session. (Editing by Jeffrey Hodgson)