* Canada dollar dips 0.8 pct despite brief rally
* Bond prices jump across curve
* Concerns linger about weakening economy
By Lynne Olver
TORONTO, Dec 29 (Reuters) - The Canadian dollar closed lower against the U.S. currency in volatile, holiday-thinned trading on Monday, unable to hold on to afternoon gains despite higher commodity prices and broad weakness in the U.S. dollar.
Bonds were higher across the yield curve, in line with recent gains in the U.S. Treasury market, as rising tensions in the Middle East prompted safe-haven flows.
The currency closed at C$1.2184 to the U.S. dollar, or 82.07 U.S. cents. That was down from C$1.2092 to the U.S. dollar last Wednesday, or 82.70 U.S. cents. Canadian financial markets were closed Thursday and Friday for the Christmas and Boxing Day holidays.
With many market players away on an extended Christmas break, the currency took some intraday swings as economic worries continued to weigh.
"We always have to be cognizant that as we head into the end of the year, it's very light trading and sometimes the moves can be outsized because of that," said Eric Lascelles, chief economics and rates strategist at TD Securities.
The Canadian dollar initially shrugged off a couple of its typical drivers: gold and oil prices. Crude rose as high as $42.20 a barrel in New York on Monday after Israel launched major airstrikes into the Gaza Strip. Oil prices subsequently eased, then pushed back up to the $40 area late in the session.
Gold futures pared early gains but still closed higher, at $875.30 an ounce in New York.
"You can't deny that the commodity story is a relevant one, commodities have taken a boost today and that is traditionally a driver of the Canadian dollar," Lascelles said.
By mid-afternoon, as Canada's main stock index moved higher, the currency rallied to the C$1.2100 area, but again retraced its steps.
Volatility could continue as parties square up their end-of-year positions, Lascelles added.
There is no major economic data in Canada or the United States to lend direction this week.
Jack Spitz, managing director of foreign exchange at National Bank Financial, said that Canada's economy is still perceived as weakening and the central bank is seen as dovish.
The North American dollar pair could gyrate within a recent range of C$1.1980 to C$1.2400, he said.
BONDS UP ACROSS THE BOARD
Domestic bond prices jumped, following U.S. Treasury market gains last Friday and on Monday.
"Canada had underperformed substantially over the prior several weeks and months, so Canada was long overdue for that catch-up," Lascelles said.
"Canada's (yield) curve is much steeper than you would logically expect, when you look at the U.S. curve and some of the others around the world," he added.
Since Canada does not have bond supply or inflation problems, it behooves participants to watch long-dated Canadian bonds because these could continue to rally, Lascelles said.
The two-year bond rose 21 Canadian cents to C$103.13 to yield 1.096 percent. The 10-year bond surged C$1.53 to C$113.45 to yield 2.628 percent.
The yield spread between the two-year and 10-year bond was at 171 basis points, up from 161 basis points at the previous close.
The 30-year bond rose C$2.10 to C$129.20 to yield 3.391 percent. In the United States, the 30-year treasury yielded 2.644 percent. (Reporting by Lynne Olver; editing by Rob Wilson)