* C$1.0297 to the U.S. dollar, or 97.12 U.S. cents
* Relief rally seen spurring trade
* Bond prices lower across the curve (Adds details, analyst comment)
By Andrea Hopkins
TORONTO, Oct 7 (Reuters) - The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Friday after U.S. and Canadian job gains were bigger than expected, buoying investor appetite for riskier assets.
North American stock markets opened stronger as the boost to employment suggested the United States had likely skirted recession despite the summer slowdown, and commodity-linked currencies like the Canadian dollar joined the relief rally.
"Dollar-Canada has been caught up in a fairly pronounced risk-on sentiment, supported in large part by U.S. payrolls which were much stronger than the market had feared," said David Tulk chief Canada macro strategist at TD Securities.
"It looks as though we are set for a very strong risk-on day."
The Canadian dollar CAD=D3 climbed to a one-week high of C$1.0235 to the U.S. dollar, or 97.70 U.S. cents, shortly after the strong U.S. payrolls data was released, more than a cent higher than Thursday's North American session close at C$1.0378 to the U.S. dollar, or 96.36 U.S. cents.
At 9:25 a.m. (1325 GMT) it settled back to C$1.0297 to the U.S. dollar, or 97.12 U.S. cents, and Tulk said the currency would likely stick within the early range for the remainder of the session.
"We've already tested the ranges ... and seem to have put in a tentative floor around C$1.0237, so from that perspective we could see some consolidation at this point," Tulk said.
Bond markets have a shortened day on Friday ahead of the long holiday weekend in Canada and the United States, so trading is likely to drop off shortly after midday.
Data showed U.S. employment grew by 103,000 September, and job gains for the prior months were revised higher, easing fears of a double-dip U.S. recession. [ID:nN1E7960AR]
While the U.S. job gains were not enough to reduce the unemployment rate -- which held steady at 9.1 percent -- Tulk said markets were ready for a good news day after big losses in recent weeks, and could wait until next week to refocus on European debt woes.
"You get a sense the market is looking to find a certain amount of optimism and that is what they've focused on today," Tulk said. "You still have to reconcile a pretty weak backdrop, but we'll take the good data where we can find it."
In Canada, a greater-than-expected 60,900 new jobs helped slice Canada's unemployment rate to 7.1 percent in September from 7.3 percent in August, Statistics Canada said on Friday.
This far exceeded the median forecast of 10,000 new jobs in a Reuters survey of economists after August's decline of 5,500. The most optimistic forecasters had predicted 30,000 new positions in September. [ID:nN1E796020]
Overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, showed that traders cut the odds of a rate cut this year or next. Higher interest rates typically help support currencies by attracting capital flows. BOCWATCH
"It weighs against possible rate cuts. The Bank of Canada is probably more convinced the economy is picking up and doesn't require further stimulus," Sal Guatieri, senior economist, BMO Capital Markets.
"It should be positive for the Canadian dollar today."
The yield on the two-year Canadian government bond CA2YT=RR, which is especially sensitive to Bank of Canada interest rate moves, rose to 0.99 percent from 0.939 percent just before the release. <0#CABMK=>
Bond prices were lower across the board. The 10-year bond CA10YT=RR lost 45 Canadian cents to yield 2.274 percent. (Editing by Jeffrey Hodgson)