* Canadian dollar at C$1.2935, or 77.31 U.S. cents
* Bond prices lower across a steeper yield curve
* Two-year yield touches highest since September 2014
TORONTO, July 6 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Thursday as oil prices rose, while domestic data showed a solid gain for the country's exports. Canada's trade deficit almost doubled to C$1.09 billion in May but in a sign of economic strength, both exports and imports reached record highs, Statistics Canada data indicated.
"The Bank of Canada will probably take some comfort from indications that export growth is holding up," said Paul Ferley, assistant chief economist at Royal Bank of Canada. Expectations for an interest rate increase as soon as next week have been rising since Bank of Canada officials said in June that a pair of rate cuts in 2015 had done their job to cushion the economy from collapsing oil prices.
Prices of oil, one of Canada's major exports, recovered some ground after a surprisingly upbeat picture of U.S. demand halted the previous day's steep slide, although the prospect of oversupply in 2018 prompted more analysts to cut their price forecasts.
At 9:24 a.m. ET (1324 GMT), the Canadian dollar was
trading at C$1.2935 to the greenback, or 77.31 U.S. cents, up 0.2 percent. The currency traded in a range of C$1.2924 to C$1.2984. It touched on Tuesday its strongest since September at C$1.2912. Still, foreign exchange strategists expect the loonie to weaken over the coming months as the recent rally driven by expectations for higher interest rates runs out of steam and lower oil prices weigh. Separate domestic data showed that the value of Canadian building permits issued in May jumped 8.9 percent on plans for more residential building construction, particularly in the red-hot Ontario market. Canadian government bond prices fell across a steeper yield curve in sympathy with U.S. Treasuries and German Bunds as minutes from the European Central Bank's June meeting showed the central bank opened the door to dropping a pledge to boost its bond-purchase programme if necessary.
The two-year fell 4 Canadian cents to yield 1.153 percent and the 10-year declined 46 Canadian cents
to yield 1.845 percent. The two-year yield touched its highest since September 2014 at 1.159 percent. Canada's employment report for June is due on Friday.
(Reporting by Fergal Smith; Editing by Meredith Mazzilli)