* Canadian dollar finishes at 96.25 U.S. cents
* Bonds higher, track U.S. market (Updates to close; adds details, quotes)
By Jennifer Kwan
TORONTO, Jan 5 (Reuters) - The Canadian dollar touched a 2-1/2-month high against the U.S. dollar on Tuesday as the greenback sagged and the commodity-linked currency got a lift from strength in oil prices.
Earlier in the session, the currency touched a high of C$1.0336 to the U.S. dollar, or 96.75 U.S. cents, its highest level since Oct. 20.
The rise was aided by a higher price for crude oil, a major Canadian export, which marched toward $82 a barrel, boosted in part by frigid weather in the U.S. and Europe, which increased demand for heating fuel. [O/R]
"What's happening is commodity prices are improving in the wake of continued recovery in the global economy," said Michael Gregory, senior economist at BMO Capital Markets, referring to recent manufacturing data from the U.S. and China.
"The industrial part of the global economy, which is the consumer of raw materials, is picking up and that ultimately provides support for commodities and the Canadian dollar. That's the fundamental theme."
The Canadian dollar finished at C$1.0390 to the U.S. dollar, or 96.25 U.S. cents, up from Monday's finish at C$1.0414 to the U.S. dollar, or 96.02 U.S. cents.
A trend of generally firmer equity markets at the beginning of the new year "lowered risk aversion, and that basically pushed the U.S. dollar and allowed the Canadian dollar to benefit," said George Davis, chief technical strategist at RBC Capital Markets.
As well, Canada benefited from a broadly weaker U.S. dollar, as softer than expected U.S. housing data dampened expectations the U.S. Federal Reserve could raise interest rates sooner rather than later. [FRX/]
Traders also locked in recent gains ahead of key U.S. jobs data expected on Friday, which could set the tone for the currency's near-term direction. [USD/]
Monday's brighter performance in financial markets renewed speculation over whether the Canadian dollar would return to parity with the greenback. Davis said the key level to watch is C$1.0238.
"If we get below there than I think more people will be convinced that we're headed for parity and jump on and add trades to reflect that view," he said.
BONDS MOVE HIGHER
Canadian bond prices were slightly higher across the curve, piggybacking on the U.S. Treasury market, where debt prices rose on Tuesday as buyers took advantage of recent price drops. [US/]
"We are seeing a little bit of a retracement phase development here just based on the fact that the market has gotten a little overextended," said Davis.
The two-year government bond <CA2YT=RR> rose 12 Canadian cents at C$99.74 to yield 1.389 percent, while the 30-year bond <CA30YT=RR> climbed 45 Canadian cents to C$115.15 to yield 4.077 percent. [ID:nLDE604160]
Canadian government bonds mostly underperformed U.S. issues, with the 30-year yield 54.3 basis points below its U.S. counterpart, compared with about 54.4 basis points on Monday.
In new issue news, Canada said on Tuesday it plans to issue a 10-year euro benchmark bond, its second foreign bond of the fiscal year, to further diversify financing for its foreign currency reserves.[ID:nLDE604160] (Reporting by Jennifer Kwan; editing by Rob Wilson)