* C$ rises to 94.63 U.S. cents
* Bond prices mostly higher, 2-year lags (Updates to close, adds details commentary)
TORONTO, Aug 26 (Reuters) - The Canadian dollar recovered a bit on Thursday from a seven-week low against the U.S. currency, supported by a modest improvement in U.S. employment data, which pumped up commodities and commodity-linked currencies.
New U.S. jobless claims fell more than expected last week but were still too high to signal a shift in the U.S. labor market, the weakness of which is constraining economic growth. [ID:nN26186848]
Crude oil futures rose for a second day to just below $74 a barrel but persistent concerns about the economy sent investors searching for the shelter of safer assets, hurting stocks and helping government bonds. [O/R] [.N]
The concerns also limited gains for the Canadian dollar.
"We had a mildly positive initial jobless report," said Doug Porter, deputy chief economist at BMO Capital Markets.
"(That) initially was a bit of a problem for the bond market, but I think the underlying concerns about the U.S. outlook are moving to the fore, leading to renewed gains in bonds, and has taken away some of the strength we saw in the Canadian dollar earlier in the day."
Also weighing on sentiment, Canadian Finance Minister Jim Flaherty, speaking in Ireland, said the struggling U.S. economy is a big concern for Canada, adding that Canadian economic growth likely eased in the second quarter from the first three months of the year. [ID:nLDE67P1QH]
A rash of disappointing data in Canada and the United States in recent weeks has deflated interest rate hike expectations and also put the Canadian dollar under pressure.
Markets are pricing in just shy of a 30 percent chance that the Bank of Canada will raise rates on Sept. 8, as measured by a Reuters calculation of yields on overnight index swaps on Thursday.
"The market has now taken away a majority consensus on a rate hike," he said. Second-quarter gross domestic product data on Tuesday "will likely seal its fate one way or another," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
The currencyended the North American session at C$1.0567 to the U.S. dollar, or 94.63 U.S. cents, up from C$1.0608 to the U.S. dollar, or 94.27 U.S. cents, at Wednesday's close.
Over the past three weeks, the currency has been driven from a possible path to parity with the U.S. dollar down to C$1.0669 to the U.S. dollar .
The Canadian dollar's retreat could be a factor in the upcoming interest rate decision.
"If the currency were trading at parity there would be more concern with respect to the implications of a move in the Canadian dollar on a rate hike. But with the currency trading at C$1.06 those same concerns are somewhat alleviated," Spitz said.
TWO-YEAR BONDS GIVE BACK SOME GAINS
Bond prices mostly edged higher due to renewed fears of a double-dip recession, but some shorter dated issues lagged slightly, signaling investors may have felt the impressive rally of late was overdone.
"Two weeks ago the two-year yield was 50 basis points higher, that's a huge move in a short period of time," said BMO's Porter.
"Given that the Bank of Canada hasn't signaled anything in those two weeks, to have such a ferocious rally is quite remarkable and it's not surprising that we're getting just a little bit of a correction here."
The two-year bondwas down 4 Canadian cents to yield 1.241 percent, while the 10-year bond rose 25 Canadian cents to yield 2.804 percent. (Reporting by Claire Sibonney; editing by Peter Galloway)
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