* Canadian dollar at C$1.2696, or 78.76 U.S. cents
* Currency's 1.6 percent gain is biggest since March 2016
* Canadian employment rises 79,500 in November
* Bond prices lower across a flatter yield curve
By Fergal Smith
TORONTO, Dec 1 (Reuters) - The Canadian dollar scored its biggest gain in 21 months against its U.S. counterpart on Friday, after stronger-than-expected domestic jobs data fueled expectations for further Bank of Canada interest rate hikes early next year.
Canadian employment rose 79,500 in November, much stronger than the 10,000 gain economists had expected. It added to robust gains in 2017, while wage growth accelerated to 2.7 percent year-on-year from 2.4 percent. labor miracle in Canada continues," said Derek Holt, head of capital markets economics at Scotiabank. "The broad takeaway is the wage and price cycle continues to turn more hawkish."
Investors expect the Bank of Canada to leave its benchmark interest rate steady at 1 percent at next week's policy decision. But chances of a hike in January rose to 66 percent from less than 50 percent before the data, the overnight index swaps market indicated. The central bank raised rates in July and September. BOCWATCH
Separate data showed that Canadian economic growth slowed to 1.7 percent in the third quarter, coming off a hot first half of the year. 4 p.m. EST (2100 GMT), the Canadian dollar CAD=D4 was trading at C$1.2696 to the greenback, or 78.76 U.S. cents, up 1.6 percent, its largest gain since March 2016.
Adding to support for the loonie, U.S. crude CLc1 prices settled 1.7 percent higher at $58.36 a barrel. Oil is one of Canada's major exports. currency touched its strongest since Monday at C$1.2683. For the week, it edged 0.1 percent higher.
Investors eyed levels around C$1.2660, which have acted as resistance for the loonie in recent weeks.
Penetration of that threshold could trigger additional buying of the currency, said Michael Goshko, corporate risk manager at Western Union Business Solutions.
Speculators added to bullish bets on the Canadian dollar for the first time in seven weeks, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed 1090741NNET .
The U.S. dollar .DXY slipped against a basket of major currencies as U.S. political uncertainty and dovish comments from Federal Reserve officials offset optimism that a U.S. tax overhaul will be passed. government bond prices were lower across a flatter yield curve, with the two-year CA2YT=RR down 17.5 Canadian cents to yield 1.525 percent and the 10-year CA10YT=RR falling 23 Canadian cents to yield 1.913 percent.
The gap between Canada's 2-year yield and its U.S. equivalent narrowed by 10.6 basis points to a spread of -25.3 basis points. On Thursday, the spread had touched its widest in five months.