* C$ at C$1.0189 vs US$ or 98.15 U.S. cents
* Canada employment drops 54,000 vs +12,000 forecast
* Markets price in increased chance of a rate cut
* Bond prices rise, outperform U.S. Treasuries
By Andrea Hopkins
TORONTO, Nov 4 (Reuters) - The Canadian dollar dropped more than a cent on Friday after Canadian employment plunged in October, bucking expectations for a gain in jobs and boosting the chances of an eventual Bank of Canada interest rate cut.
Canadian employers cut almost all the jobs gained in the previous month as a sluggish economy led to layoffs in the manufacturing and construction sectors, data showed.
"It is definitely suggesting the economy is slowing. I don't think it is enough to get the Bank of Canada to cut at this point, but one or two more of these and there is a strong possibility that the bank could start reducing interest rates," said Sheryl King, head of Canadian economics at Bank of America-Merrill Lynch.
The Canadian dollar CAD=D3 fell to a session low C$1.0197 to the U.S. dollar, or 98.07 U.S. cents, more than a cent below Thursday's North American session close at C$1.0081 to the U.S. dollar, or 99.20 U.S. cents.
Net job losses of 54,000 last month were the largest since February 2009 and pushed the unemployment rate back up to 7.3 percent - the same level seen in August - from 7.1 percent.
The data contrasted with market expectations for 12,000 new positions and followed an equally surprising increase in September of nearly 61,000. [ID:nN1E7A3026]
"So it looks like global economic fears and Europe's debt crisis are taking a toll on Canadian business confidence and hiring intentions," said Sal Guatieri, senior economist at BMO Capital Markets.
"Clearly it will discourage the Bank of Canada from raising interest rates for quite some time. If economic conditions deteriorate, it's possible the Bank would cut interest rates. For the moment, though, we expect steady policy."
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders priced in higher odds of a rate cut next year. BOCWATCH
However, recent polls of economists have consistently shown they expect the Bank of Canada to hold its key policy rate - now at still stimulative 1 percent - for an extended period rather than cut. [CA/POLL]
Market focus is now on U.S. employment data, due out at 8:30 a.m. (1230 GMT). Analysts surveyed by Reuters said they expect a gain of 120,000 jobs in October, after a 137,000 gain in September. The unemployment rate is seen steady at 9.1 percent.
David Tulk, chief Canada macro strategist at TD Securities, said that while the Canadian dollar is reacting to fundamentals by weakening on the negative Canadian jobs report, U.S. data and the ongoing chaos in Europe may soon shift sentiment.
"Keep in mind there's still U.S. payrolls due out a little later and obviously the headlines coming out of Greece that's likely to be a bit more severe," Tulk said.
World stocks and the euro rose on Friday, boosted by expectations that Greece will avoid a referendum on a new bailout package, easing imminent concerns of a Greek default and its potential shockwaves through the euro zone. [MKTS/GLOB]
However, political uncertainty in Greece continued to unnerve investors and markets were also watching developments in Italy, which has agreed to have the IMF and European Union monitor its progress on long-delayed economic reforms, senior EU sources said on Friday. [ID:nL6E7M40XN]
Canadian government bond prices were higher across the curve. The two-year bond CA2YT=RR rose 9.5 Canadian cents to yield 0.951 percent. The two-year yield, which is especially sensitive to Bank of Canada interest rate moves, was at 1 percent just before the release. <0#CABMK=>
The 10-year bond CA10YT=RR climbed 40 Canadian cents to yield 2.206 percent. Canadian government bonds outperformed U.S. Treasuries across the yield curve. (Editing by Jeffrey Hodgson)