TORONTO, May 26 (Reuters) - The Canadian dollar edged higher against its U.S. counterpart on Friday but still posted a weekly decline as the recent rise in U.S. bond yields helped underpin the greenback.

The loonie was trading 0.1% higher at 1.3625 to the greenback, or 73.39 U.S. cents, after touching its weakest intraday level since April 28 at 1.3654. For the week, the currency was down 0.9%.

"The Canadian dollar continues to suffer collateral damage as U.S. rate expectations revert back toward pre-banking panic levels," said Karl Schamotta, chief market strategist at Corpay.

Federal Reserve policymakers got a dose of unexpectedly strong U.S. economic data that bolstered the case for further monetary policy tightening to bring down persistently high inflation.

Still, investors could turn bullish on Canada's commodity-linked currency if some of the uncertainty hanging over financial markets clears.

"If Congress manages to raise the U.S. debt ceiling ahead of the June 1 deadline, a global relief rally could take place," Schamotta said. "Something resembling a short squeeze might unfold for the loonie next week."

Wall Street stocks rose on Friday and the price of oil, one of Canada's major exports, was up 0.9% at $72.46 a barrel as U.S. officials appeared close to striking a debt ceiling deal.

Preliminary domestic data showed wholesale trade up 1.6% in April from March, while Canada's finance ministry said that the budget deficit shrank to C$41.31 billion ($30.89 billion) in fiscal 2022/23 as a post-pandemic economic rebound spurred tax revenue and spending on support measures fell.

Canadian government bond yields were higher across the curve, tracking moves in U.S. Treasuries. The 10-year touched its highest level since March 7 at 3.369% before dipping to 3.348%, up 4 basis points on the day.

Reporting by Fergal Smith Editing by Alistair Bell

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