* Canadian dollar at C$1.2374, or 80.81 U.S. cents
* Bond prices higher across flatter yield curve
* Bank of Canada interest rate decision due on Wednesday
TORONTO, Sept 5 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday as oil prices rose, while investors weighed prospects of a Bank of Canada interest rate hike as early as this week. Prices of oil, one of Canada's major exports, climbed as the gradual restart of refineries in the Gulf of Mexico that were shut by Hurricane Harvey raised demand for crude.
U.S. crude prices were up 2.16 percent at $48.31 a
barrel. On Wednesday, the Bank of Canada is likely to announce it will leave rates unchanged, a Reuters poll released on Friday showed. The bank will probably wait until October to raise them, according to the survey. Still, the chances of a hike this week have climbed to more than 40 percent, the overnight index swaps market indicated, from around 20 percent before data on Thursday showing Canada's economy expanded in the second quarter at its fastest pace in nearly six years. The central bank raised rates in July for the first time in nearly seven years. Its policy rate stands at 0.75 percent.
At 9:06 a.m. ET (1306 GMT), the Canadian dollar was
trading at C$1.2374 to the greenback, or 80.81 U.S. cents, up 0.3 percent. The currency traded in a range of C$1.2368 to C$1.2416. It posted on Friday a two-year high at C$1.2340. Canada's bond and stock markets were closed on Monday for Labor Day. Speculators have increased bullish bets on the loonie, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday. Canadian dollar net long positions have edged up to 53,167 contracts as of Aug. 29 from 51,099 a week earlier. Simmering geopolitical tensions put investors off adding big bets before a European Central Bank meeting this week when policymakers might voice some concerns about the single currency's strength. Analysts and South Korean policymakers believe North Korea may test another weapon on or around Sept. 9, when it celebrates its founding day. Canadian government bond prices were higher across a flatter yield curve in sympathy with U.S. Treasuries as tensions over North Korea fed investor demand for safe-haven assets.
The two-year rose 0.5 Canadian cent to yield 1.338 percent, and the 10-year climbed 44 Canadian
cents to yield 1.864 percent. Canada's trade data for July is due on Wednesday, while the August employment report is awaited on Friday.
(Reporting by Fergal Smith; Editing by W Simon)