* Canadian dollar gains 0.2% against the greenback * Canada's trade deficit narrows to C$677 million in May * Price of U.S. oil increases 1.7% * Canadian bond yields rise across a steeper curve By Fergal Smith TORONTO, July 2 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Thursday as domestic data showing a narrower-than-expected trade deficit supported hopes of economic recovery, with the loonie moving in reach of a one-week high it notched the previous day. Canada posted a trade deficit of C$677 million in May as exports jumped 6.7%, data from Statistics Canada showed. Analysts had forecast a deficit of C$3 billion. "This report is consistent with the V-shaped recovery story, as activity picked up in May after the economy bottomed in April," said Ryan Brecht, a senior economist at Action Economics. In a V-shaped recovery, activity rebounds quickly after a sharp decline. "Yet uncertainty remains elevated, with the resurgence in virus cases and pause in reopenings prompting worries that the recovery stalled in late June," Brecht said. Several U.S. states, along with some other parts of the world, are reversing or pausing reopenings to tackle a recent surge in infections. The loonie was trading 0.2% higher at 1.3563 to the greenback, or 73.73 U.S. cents. The currency, which on Wednesday touched its strongest intraday level since June 24 at 1.3541, traded in a range of 1.3563 to 1.3611. The Canadian dollar is likely to gain over the coming year if a potential economic recovery from the coronavirus crisis boosts stocks and the price of oil, assets closely tracked by the currency, toward pre-pandemic levels, a Reuters poll showed. Global shares were boosted on Thursday by signs of progress on developing a COVID-19 vaccine and as data showed a record U.S. jobs gain, while U.S. crude prices were up 1.7% at $40.50 a barrel. Canadian government bond yields rose across a steeper curve as the market reopened following the Canada Day holiday on Wednesday. The 10-year yield climbed 5.8 basis points to 0.585%. (Reporting by Fergal Smith; editing by Jonathan Oatis)
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