* Oil prices surge 10 percent, aid C$ rally
* Currency's move exaggerated by thin trade
* Bonds pinned lower in quiet, shortened session (Recasts with comments and closing numbers)
By Frank Pingue
TORONTO, Feb 13 (Reuters) - The Canadian dollar rallied against the greenback on Friday as a surge in oil prices gave the commodity-linked currency a boost in a quiet session that saw exaggerated moves in thin trade heading into a long weekend.
Currency experts also suggested that some traders may have been caught long on the U.S. dollar and squared positions as Group of Seven finance ministers meet in Rome this weekend.
And just as in recent sessions, Canada's currency generated buying interest mainly when it slipped down through C$1.25.
"The fact of the matter is dollar/Canada still really can't get any traction on the topside," said Steve Butler director of foreign exchange trading at Scotia Capital.
"And there were rumors the G7 might talk about the weak pound and within all that ... I think the market got caught a bit long so basically we just saw the (U.S.) dollar soften up."
The Canadian dollar closed at C$1.2341 to the U.S. dollar, or 81.03 U.S. cents, up from C$1.2448 to the U.S. dollar, or 80.33 U.S. cents, at Thursday's close.
For the week, the Canadian dollar fell 0.9 percent.
Helping to power Friday's rally was a 10 percent jump in oil prices on hopes that the U.S. economic stimulus package can help pull that economy out of recession. Canada is a key oil exporter, whose economy relies heavily on exports, the bulk of which are consumed by the United States.
Still, the Canadian dollar ended well off its overnight high of C$1.2281, or 81.43 U.S. cents, a level that was reached as overseas stock markets rallied on hopes for a U.S. government plan to subsidize mortgages.
But the overnight move in equities was a reaction to news released late during Thursday's session and failed to continue in the North American session, when equities ended lower.
"It's basically the same relationship as before that has been driving the price action -- i.e., the price movement in equities," said George Davis, chief technical strategist at RBC Capital Markets.
BOND PRICES END LOWER
Canadian bond prices finished lower across the curve in a shortened session in which investors pocketed some of the market's recent gains.
The drop in bond prices extended a late-session drop on Thursday after news that Washington was planning to subsidize mortgage payments for financially stretched homeowners.
And with no Canadian economic figures due until next week, the Canadian bond market took its cue from the bigger U.S. Treasury market, which stumbled on heightened supply worries.
The move in bond prices was also slightly exaggerated given the shortened session ahead of a long weekend. The Canadian bond and U.S. Treasury markets will be closed on Monday for market holidays in both countries.
The Canadian economic data calendar will pick up next week with a slew of reports. The consumer price index for January, to be released on Feb. 20, is likely to attract the most attention.
The interest-rate sensitive two-year bond fell 9 Canadian cents to C$102.73 to yield 1.201 percent, while the 10-year bond shed 33 Canadian cents to C$110.50 to yield 2.948 percent.
The 30-year bond ended down 55 Canadian cents at C$123.15 to yield 3.676 percent.
Canadian bonds were mostly in line with U.S. Treasuries across the curve. The Canadian 30-year bond yield was about 0.40 basis points above its U.S. counterpart, compared with 12.5 basis points on Thursday. (Editing by Peter Galloway)