* C$ firms to 3-wk high of $1.0324, then pares gains
* Finishes at $1.0296 to U.S. dollar
* Bonds firm (Updates to close)
TORONTO, March 30 (Reuters) - The Canadian dollar hits its highest level against the greenback in three weeks on Wednesday but closed the day off that high as traders squared positions ahead of key economic data on Thursday and Friday.
The Canadian currency reached the three-week high -- C$0.9686 to the U.S. dollar, or $1.0324 -- just after the start of the North American session. It never returned to that level although it got support from commodity prices and stronger stock markets.
The retreat from the high was was attributed to the market's reticence to stake out strong positions ahead of Friday's U.S. nonfarm payroll data, which is expected to show 190,000 jobs were created. To a lesser extent, traders will also watch Thursday's Canadian gross domestic product CAGDPM=ECI figures for January.
"It's been a pretty quiet day since we touched that high," said Darren Richardson, corporate dealer at CanadianForex. "The market is taking a break in preparing for tomorrow's Canadian GDP and more importantly Friday's (U.S.) employment."
The Canadian GDP data will likely not be strong enough to spur The Bank of Canada to raise interest rates next month. But it will likely be enough to set the stage for an upgraded economic outlook by the bank in its Monetary Policy Report in April.
Economists say the Canadian economy started the year on a solid footing, estimating a 0.5 percent GDP rise in January, matching December's gain on a strong contribution from manufacturing and wholesale trade.
"I think it will most likely come in with expectations and that will hold the Canadian dollar at current levels, around C$0.97," said Richardson, adding that the range would likely stay between C$0.9690 and C$0.9750 until Friday's jobs data.
The Canadian dollar CAD=D4 finished at C$0.9713 to the U.S. dollar, or $1.0296, up modestly from Tuesday's North American finish of C$0.9747 to the U.S. dollar, or $1.0260.
Camilla Sutton, chief currency strategist at Scotia Capital, noted increased chatter on the carry trade and its rebuilding momentum, with safe-haven currencies such as the yen significantly weaker. The Canadian dollar strengthened in sympathy with other commodity-linked currencies such as the New Zealand dollar and the Australian dollar, both of which were outperformers.
Speculation that Japanese investors may reduce dollar hedging positions related to their overseas investments is helping shift focus back to economic fundamentals and reinforcing the yen's status as a funding currency. [FRX/]
CIBC predicted on Wednesday that the Canadian dollar will weaken below U.S. dollar parity to C$1.02 by the end of June, from a previous view of C$1.04, before partly recovering to C$0.99 by year-end. CIBC noted that speculators have recently pushed the net long positions on the currency to a two-year high, and said it is particularly vulnerable to a reversal if a cooling of global political tensions sends oil prices weaker.
BOND PRICES FIRM
Canadian government bond prices were mildly firmer across the curve, erasing earlier weakness spurred by rising equity markets and a tepid auction of new seven-year Treasury notes.
U.S. Treasuries were also relatively stable ahead of Friday's U.S. employment data, following an almost two-week sell-off, as traders have already priced in very bullish expectations. [US/]
The interest rate-sensitive two-year bond CA2YT=RR was up 4 Canadian cents to yield 1.778 percent, while the 10-year bond CA10YT=RR was unchanged to yield 3.297 percent.
In new issues, the province of Quebec sold C$500 million in a reopening of an existing 10-year issue. (Reporting by Ka Yan Ng; editing by Peter Galloway)