* C$ closes at C$0.9832 vs US$, or $1.0171
* C$ retests highest level since March 2008
* Bond prices firm as investors eye Libya revolt
(Updates to close, adds details, quotes)
By Claire Sibonney
TORONTO, Feb 24 (Reuters) - Canada's dollar revisited its 2011 high against the U.S. currency on Thursday, supported by oil's rise since the revolt in Libya started and prospect higher energy prices could spur tighter Canadian monetary policy.
The country's commodity-linked currency returned to its loftiest level in nearly three years even though oil pared gains following Saudi Arabia's assurances it could fill any Libyan supply shortfalls and unsubstantiated rumors Libyan leader Muammar Gaddafi had been shot. [O/R]
Michael Gregory, senior economist at BMO Capital Markets, said the recent run-up in oil over Mideast tensions could still be having a lingering positive impact, something the central bank will weigh in its policy announcement on March 1.
"Since Canada is a net oil exporter, this extra boost we're going to get from higher oil prices specifically could provide that little extra wealth in income spreading across the country, and perhaps necessitate slightly more aggressive Bank of Canada policy over the next little while," he said.
A Reuters poll released on Thursday showed the central bank is unanimously expected to remain on hold on Tuesday, with the first interest rate hike of 2011 widely anticipated in May. [CA/POLL]
John Curran, senior vice president at CanadianForex, noted the currency's correlation to commodities has faded recently, but the Canadian dollar should ultimately benefit if investors see a sustained move higher in oil.
"We're kind of at the right levels for the Canadian dollar. ... and I think people are going to be careful not just to react to that one commodity," he said.
The Canadian dollar also benefited from broader weakness in the greenback on fears higher oil prices will hurt U.S. consumer spending. [FRX/]
"In other times, you've had a flight to safety bid to the U.S. dollar that may have counteracted some of the positive news on Canada but the U.S. dollar is struggling here," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.
There was little other impetus to drive the Canadian dollar on Thursday. The next major data is the December and fourth-quarter read on economic growth on Monday, followed by the Bank of Canada's policy setting decision on Tuesday.
Pricing in that the Bank of Canada will hike rates again long before the U.S. Federal Reserve, RBC said it expects the Canadian dollar to meaningfully take out key resistance at C$0.9837, on the way to reach C$0.96 by mid-year.
The Canadian currency CAD=D4 ended at C$0.9832 to the U.S. dollar, or $1.0171, up from Wednesday's North American finish at C$0.9886 to the U.S. dollar, or $1.0115.
It had reached as high as C$0.9816 to the U.S. dollar, or $1.0187 -- a level it also hit on Feb. 17 -- which is the strongest the currency has been since March 2008. If it breaks this level, a run towards C$0.9800 may be in the cards, analysts say.
LIBYA PROMPTS RUSH TO BONDS
Canadian government bond prices edged higher across the curve, following the broader move in U.S. Treasuries, as the revolt in Libya spurred safe-haven demand.
However the interest-rate sensitive short end of the curve lagged due to uncertainty over the Bank of Canada's near term path, said BMO's Gregory.
The two-year Canadian government bond CA2YT=RR was flat to yield 1.802 percent, while the 10-year bond CA10YT=RR gained 7 Canadian cents to yield 3.319 percent.
"The shock of oil prices could very well be from a global perspective more negative for growth, perhaps more for the U.S. than for inflation, so that's why the bond market has no problem doing better today," he added. (Additional reporting by Ka Yan Ng; editing by Jeffrey Hodgson)