* Canadian dollar at C$1.2723, or 78.60 U.S. cents
* Chance of October rate hike rises to near 65 percent
* Bond prices lower across the yield curve
* 10-year yield reaches its highest since Dec 2014, 2-year touches highest since September 2013
TORONTO, July 13 (Reuters) - The Canadian dollar firmed on Thursday against its U.S. counterpart, extending sharp gains made in the previous session as domestic bond yields rose in anticipation of additional rate increases from the Bank of Canada. The loonie surged to its highest in more than a year on Wednesday, scoring its biggest one-day gain since March, after the central bank raised interest rates for the first time since 2010. Chances of another interest rate hike by October have increased to nearly 65 percent from roughly one-in-two before the rate decision, data from the overnight index swaps market showed. The U.S. dollar also rose against its peers, bouncing from losses in the previous session, as data showed the number of Americans filing for unemployment benefits fell last week and producer prices unexpectedly rose in June. The data, which came a day after Federal Reserve chair Janet Yellen signaled a less hawkish stance than anticipated, was expected to keep the Fed on track for a third interest rate increase this year. "The market correctly, I think, reevaluated her (Yellen's) dovish stance from yesterday," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets. "In light of that, you could say the fact that the Canadian dollar could hold on to its gains is a bit of an accomplishment."
At 4:00 p.m. ET (2000 GMT), the Canadian dollar was
trading at C$1.2723 to the greenback, or 78.60 U.S. cents, up 0.2 percent. The currency traded in a range of C$1.2722 to C$1.2771. It touched on Wednesday its strongest since June 2016 at 1.2681. Prices of oil, one of Canada's major exports, rose as robust Chinese demand was seen helping to drain the global supply glut.
U.S. crude was up 1.23 percent to $46.05 a barrel.
New housing prices in Canada climbed 0.7 percent in May, more than economists' forecasts for a 0.3 percent increase, as prices continued to rise in the hot markets of Toronto and Vancouver, Statistics Canada said. Canadian government bond prices were lower across the yield
curve, with the two-year down 3.5 Canadian cents to yield 1.214 percent and the 10-year falling 30
Canadian cents to yield 1.912 percent. The 2-year yield touched its highest intraday level since September 2013 at 1.257, while the 10-year touched 1.948 percent, a level not reached since December 2014.
(Reporting by Fergal Smith; Editing by Bernadette Baum and Andrew Hay)