* C$ jumps as high as C$0.9653 vs US$, or $1.0359
* Bond prices extend losses across the curve
* BoC holds at 1 pct; signals rates will eventually rise (Updates with details, commentary)
By Claire Sibonney
TORONTO, May 31 (Reuters) - Canada's dollar rallied to its highest in more than a week against the U.S. dollar on Tuesday and bond prices fell following more hawkish-than-expected language from the Bank of Canada.
The central bank kept its key interest rate unchanged at 1 percent but for the first time since the recession it said it will have to lift borrowing costs if economic growth continues. [ID:nN31112740]
After the announcement, the currency CAD=D4 climbed as high as C$0.9653 to the U.S. dollar, or $1.0359, up from C$0.9723 to the U.S. dollar, or $1.0285, immediately before the scheduled release. It was the Canadian dollar's strongest level since May 20.
"It doesn't sound like the central bank is gearing up for a rate hike in July but the warning that rate hikes will eventually come suggests that we'll see a few hikes before the end of the year," said Avery Shenfeld, chief economist at CIBC.
"I think the bank was uncomfortable with the market starting to assume that it was going to wait forever to begin hiking and with the resulting impact on mortgage rates, which have been falling."
Shenfeld noted that, ironically, this will add a bit of upward pressure for the Canadian dollar's value, as the currency's strength was a factor delaying a rate hike rather than accelerating it.
The Canadian dollar was already on stronger footing heading into the statement as global risk sentiment was lifted by Greece bailout hopes. [MKTS/GLOB]
At 9:45 a.m. (1345 GMT), the Canadian dollar CAD=D4 was at C$0.9663 to the U.S. dollar, or $1.0349, up from C$0.9771 to the U.S. dollar, or $1.0234, at Monday's close.
The move finally pushed the currency out of its tight C$0.9735-C$0.9817 range in the last six sessions.
"Markets clearly are assuming rates are going to go up before the year end, but the statement is maybe a little bit more hawkish than had been assumed, so it could provide some support for the Canadian dollar," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
Overnight index swaps, which trade based on expectations for the key central bank policy rate, showed investors slightly reducing the likelihood of a rate hike in July, but increasing the odds of tightening in September, October and December. BOCWATCH
The market sees a 94.2 percent chance rates will stay on hold in July, up slightly from 93.56 percent just before the announcement on Tuesday.
Canadian bond prices extended losses across the curve after the rate announcement. Canada's two-year bond CA2YT=RR was down 13 Canadian cents to yield 1.576 percent, while the 10-year bond CA10YT=RR retreated 27 Canadian cents to yield 3.094 percent.
Later in the session, Canadian Finance Minister Jim Flaherty is set to meet with private sector economists to round out growth forecasts ahead of the introduction of the federal budget on June 6. [ID:nN25109201] (Reporting by Claire Sibonney; Editing by Kenneth Barry)