CANADA FX DEBT-C$ rises after strong U.S. jobs report

* C$ at C$0.9746 to the U.S. dollar, or $1.0261

* Pulls back from 5-week low after U.S. jobs report

* U.S. jobs data eases recession fears

* Canadian data helps support market

* Bond prices fall as safe-haven bid fades

By Andrea Hopkins

TORONTO, Aug 5 (Reuters) - Canada’s dollar strengthened against the U.S. currency on Friday morning, rebounding from a five-week low, after stronger-than-expected U.S. jobs data eased fears about a recession and calmed jittery investors.

The U.S. data came on the heels of a Canadian employment report that showed the unemployment rate in July at its lowest level since December 2008 and strong private-sector job gains. But overall hiring was lower than analysts had forecast.

U.S. job growth accelerated more than expected in July as private employers stepped up hiring, a development that eased fears that the economy was sliding into another recession. [ID:nOAT004847]

“The U.S. number on top of the Canadian data helps Canada overall -- it’s not all doom and gloom anymore,” said Sebastien Lavoie, economist at Laurentian Bank of Canada BLC Securities in Montreal.

“Basically, talks of a U.S. recession and rate cuts in Canada were erroneous.”

Canada’s unemployment rate fell to 7.2 percent in July, its lowest level since December 2008, from 7.4 percent in June, though this was more due to people dropping out of the labor market than to new employment. [ID:nN1E77404O]

Statistics Canada said the economy managed to eke out 7,100 new jobs, after picking up 28,400 jobs in June.

The increase was less than half that expected in a Reuters survey of analysts but was marked by a healthy switch to full-time and private-sector employment.

The Canadian dollar, which had strengthened on the Canadian jobs report, climbed further after the strong U.S. data.

The Canadian dollar CAD=D4 rose to C$0.9746 to the U.S. dollar, or $1.0261, after the data, well up from Thursday's North American close of C$0.9795 to the U.S. dollar, or $1.0209.

U.S. and Canadian stock markets rebounded after plunging on Thursday in one of the worst trading days since the 2009 recession as fears about a slowdown in U.S. economic growth and its knock-on effect in Canada receded.

Investors remain cautious, however, about contagion in Europe from the debt crisis, and Lavoie said the European anguish remains the biggest factor holding back the Canadian dollar.

“The main risk for the Canadian dollar is the possibility of contagion in Italy and Spain, not an economic recession,” he said.

He said a string of healthy economic data in Canada has increased the likelihood that the Bank of Canada will raise interest rates late in 2011, a possibility the market had begun to discount after soft U.S. data suggested Canada’s largest trading partner was falling back into recession.

“September is not in the cards as we were expecting, but I still have hopes the Bank of Canada will lift rates before the end of the year,” he said.

Higher rates in Canada would attract more investors and push up the currency, especially since the U.S. Federal Reserve has not yet begun to unwind easier monetary policy.

Short-dated government bonds fell after the robust jobs data as their flight-to-safety allure faded.

Canada's two-year bond CA2YT=RR was down 9 Canadian cents to yield 1.063 percent, while the 10-year bond CA10YT=RR fell 79 Canadian cents to yield 2.588 percent.