By Fergal Smith
TORONTO (Reuters) - The Canadian dollar strengthened to a three-month high against its U.S. counterpart on Friday after stronger-than-expected domestic jobs data boosted expectations for a Bank of Canada interest rate hike as soon as this month.
The Canadian economy added almost 80,000 jobs for the second month in a row in December on a surge in part-time employment, and the jobless rate dipped to a 41-year low of 5.7 percent, Statistics Canada said. Analysts had expected a modest gain of 1,000 jobs.
"It certainly fits with a central bank that is likely to lift rates this quarter," said Andrew Kelvin, senior rates strategist at TD Securities.
Chances of a hike at the next rate decision on Jan. 17 rose to more than 60 percent from 35 percent before the data, the overnight index swaps market indicated.
In separate data, Canada's trade deficit in November widened to C$2.54 billion as both exports and imports benefited from increased activity in the automotive industry, Statistics Canada said.
At 9:17 a.m. EST (1417 GMT), the Canadian dollar
The currency touched its strongest since Sept. 27 at C$1.2355.
Still, analysts in a Reuters poll say that an uncertain outlook for the North American Free Trade agreement could weigh on the loonie over the coming months.
The U.S. dollar (DXY) pared gains against a basket of major currencies on Friday after data showed the U.S. economy created fewer jobs than expected in December.
The price of oil, one of Canada's major exports, fell as soaring U.S. production undermined a 10 percent rally from December lows.
U.S. crude (CLc1) prices were down 0.84 percent at $61.49 a barrel.
Canadian government bond prices were lower across the yield curve, with the two-year (CA2YT=RR) down 14 Canadian cents to yield 1.783 percent, its highest since June 2011, and the 10-year (CA10YT=RR) falling 63 Canadian cents to yield 2.161 percent.
The gap between Canada's 2-year yield and its U.S. counterpart narrowed by 7.9 basis points to a spread of -17.4 basis points, its narrowest since Oct. 30.