(Adds analyst comment, updates prices to close)
* Canadian dollar settles at C$1.2853, or 77.42 U.S. cents
* Bond prices lower across the maturity curve
By Alastair Sharp
TORONTO, Aug 16 (Reuters) - The Canadian dollar strengthened to a seven-week high against its broadly weaker U.S. counterpart on Tuesday as oil rose and domestic data showed a rebound in factory sales.
The greenback was pummeled by investors tempering bets on the timing and pace of U.S. Federal Reserve rate hikes.
But unless prices for oil - a major Canadian export - rally further, strategists see little chance of the Canadian currency's recent gains.
"I think we'll see this trend disconnect and I think we'll see the loonie give up some of the more recent ground it's gained," said Scott Smith, senior market analyst at Cambridge Global Payments.
The Canadian dollar CAD=D4 ended the day trading at C$1.2853 to the greenback, or 77.80 U.S. cents, firmer compared with Monday's close of C$1.2917, or 77.42 U.S. cents.
The currency's weakest level of the session was C$1.2933, and it touched its strongest since June 24 at C$1.2798.
Oil rose 2 percent, hitting five-week highs for a second straight day as sources at OPEC spoke of Saudi Arabia's apparent desire for higher crude prices while Russia met with the cartel to discuss the market. O/R
Canadian factory sales increased 0.8 percent in June from May as sales of machinery and transportation equipment grew, according to Statistics Canada data. retail sales and inflation data are due at the end of the week.
"There needs to be a stark rebalancing, a stark selloff in the loonie to get back to those levels that are going to stimulate business investment and stimulate export growth," Cambridge's Smith said.
Weak U.S. business investment has hampered a long-awaited pick-up in growth of Canada's non-energy exports, economists say, while a weaker Canadian dollar has not helped exports as much as expected. government bond prices were lower across the maturity curve, with the two-year CA2YT=RR bond down 3.5 Canadian cents to yield 0.567 percent and the benchmark 10-year CA10YT=RR down 19 Canadian cents to yield 1.066 percent.