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CANADA FX DEBT-C$ rises as economic growth spurs fall rate hike expectations

* Canadian dollar at C$1.2454, or 80.30 U.S. cents

* Canada's economy grows 0.6 percent in May

* Bond prices lower across the yield curve

* Two-year yield touches its highest intraday since April 2012

TORONTO, July 28 (Reuters) - The Canadian dollar strengthened on Friday against its U.S. counterpart, as stronger-than-expected growth in the domestic economy supported expectations for another interest rate hike from the Bank of Canada in the coming months. Canada's gross domestic product expanded 0.6 percent in May on growth in the energy, manufacturing and retail trade sectors, Statistics Canada said, exceeding economists' forecasts for a 0.2 percent rise. The central bank raised rates to 0.75 percent earlier this for the first time in nearly seven years. Chances of another rate hike as soon as September have doubled since last week to 40 percent, while there is nearly a four-in-five chance of a hike by October, data from the overnight index swaps market showed. "The October (central bank policy) meeting is pretty much set in stone at this point," said Jimmy Jean, a senior economist at the Desjardins brokerage, referring to expectations of a rate rise. "It seems that the bar would be very high for them not to proceed at this meeting."

At 9:51 a.m. ET (1351 GMT), the Canadian dollar was

trading at C$1.2454 to the greenback, or 80.30 U.S. cents, up 0.8 percent. The currency traded in a range of C$1.2439 to C$1.2567. It touched on Thursday its strongest in more than two years at C$1.2414. Adding to support for the loonie, prices of oil, one of Canada's major exports, reached fresh two-month highs as investors digested signs of an easing oversupply picture.

U.S. crude prices were up 0.63 percent at $49.35 a

barrel. Canadian government bond prices were lower across the yield

curve, with the two-year down 7.5 Canadian cents to yield 1.337 percent and the 10-year falling 33

Canadian cents to yield 2.035 percent. The two-year yield touched its highest intraday since April 2012 at 1.358 percent, while the gap between it and its U.S. counterpart narrowed by 3.8 basis points to a spread of -2.4 bps. Data showing that U.S. labor costs increased less than expected in the second quarter weighed on U.S. Treasury yields, offsetting other data showing that U.S. economic growth accelerated in the second quarter.

(Reporting by Fergal Smith; Editing by W Simon)