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C$ rallies as greenback gives back some recent gains

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto

By Fergal Smith

TORONTO (Reuters) - The Canadian dollar strengthened to its highest level in two weeks against the U.S. dollar on Thursday as oil prices rose and investors reduced their exposure to the U.S. currency.

The loonie was trading 0.6% higher at 1.2810 to the greenback, or 78.06 U.S. cents, after touching its strongest level since May 5 at 1.2784. On Wednesday, the currency fell 0.6% as Wall Street tumbled.

The market seems to be moving away from the recent theme of rising U.S. bond yields driving the greenback higher and "diversifying risk," said Amo Sahota, director at Klarity FX in San Francisco.

The U.S. dollar fell across the board, extending its pullback from a two-decade high, as most major currencies battered by the greenback's advance this year drew some buyers.

The price of oil, one of Canada's major exports, rebounded from two days of losses on optimism that easing lockdown restrictions in China could boost demand. U.S. crude oil futures settled 2.4% higher at $112.21 a barrel.

The Canadian dollar has fallen 1.4% against the greenback since the start of the year but that is a much smaller decline than for the other G10 currencies.

Canada's strong economic performance and the prospect of another upsized interest rate hike by the Bank of Canada means that "the loonie looks like good bet," Sahota said.

Domestic data showed producer prices climbing in April at an annual rate of 16.4%. With inflation soaring, money markets expect a second straight half-percentage-point interest rate hike by the Bank of Canada at its next policy decision on June 1.

Canadian government bond yields were lower across the curve, tracking the move in U.S. Treasuries. The 10-year touched its lowest since April 28 at 2.830% before recovering to 2.885%, down 6.2 basis points on the day.

(Reporting by Fergal Smith; Editing by Paul Simao and Sandra Maler)