* C$ weakens to C$0.9631 to U.S. dollar, or $1.0383
* Fell to C$0.9665 after U.S. non-farm payrolls data
* Falling oil, copper and commodities weigh
* Bonds higher across the curve
By Trish Nixon
TORONTO, July 8 (Reuters) - The Canadian dollar dropped against it's U.S. counterpart on Friday after disappointing U.S. employment data hit investor sentiment and overshadowed strong Canadian figures released earlier in the day.
The U.S. jobs data showed employment growth there ground to a halt in June, dousing hopes that its economy, the destination for most Canadian exports, would regain momentum in the second half of the year. [ID:nOAT004829]
"Not only was the headline disappointing, the jobless rate rose, but also if you look at the labor income growth, up less than two percent, that's not particularly good for consumption or for the U.S. economy," said Peter Buchanan, senior economist at CIBC World Markets.
The Canadian dollar had strengthened earlier in the session after domestic data showed that Canada's economy generated a surprising 28,400 jobs in June, compared with the 15,000 expected by markets. [ID:nN1E767019]
But it immediately dropped to a session low, falling as far as C$0.9665 to the U.S. dollar, or $1.035, following the release of the U.S. data.
At 10.00 a.m. (14:00 GMT) the Canadian dollar CAD=D4 was at C$0.9631 to the U.S. dollar, or $1.0383, down from Thursday's finish at C$0.9587.
The U.S. economy actually created fewer jobs than its Canadian counterpart in June despite being many times its size.
The uncertain external environment, combined with the absence of domestic wage pressures, could be more meaningful to the Bank of Canada than employment gains when it plots the path for interest rates, analysts said.
The central bank could opt to postpone rate hikes in the belief the economy can continue to expand without prices getting out of hand. Higher interest rates tend to help currencies by attracting international capital flows.
Yields on overnight index swaps, which trade based on expectations for the central bank policy rate, continued to reflect almost zero chance of a rate move on July 19.
Rate hike expectations for September, October and December briefly rose after the Canadian data but fell again after the U.S. release. BOCWATCH
Still, Buchanan warned that it's dangerous to look too much at one figure.
"We were looking certainly for a rate increase in October. I don't think this prevents them from moving at that time, but we'll have to see what the data from the next few months shows," Buchanan said.
He added that the central bank would certainly be watching the impact of the U.S. data on resource prices.
Canada's economy is heavily dependent on raw materials, and soft commodity prices generally pressure the currency.
Prices of oil, copper and most other commodities were lower after the U.S. report. [O/R] [MET/L]
Canadian bond prices were higher across the curve, as investors moved back toward safe-haven assets on concerns about the weak U.S. economy.
The Canadian government two-year bond CA2YT=RR was up 11 Canadian cents to yield 1.523 percent, while the 10-year bond CA10YT=RR rose 55 Canadian cents to yield 2.993 percent.
Canadian bonds mostly underperformed U.S. Treasuries, with the Canadian 10-year yield 4.6 basis points below its U.S. counterpart, compared with 8.4 basis points lower yesterday. (Editing by Jeffrey Hodgson)