* Canadian dollar at C$1.2892, or 77.57 U.S. cents
* Domestic GDP falls 0.1 percent in August
* Bond prices higher across a steeper yield curve
* Canada-U.S. 2-year spread reaches widest since July 11
TORONTO, Oct 31 (Reuters) - The Canadian dollar weakened against its U.S. counterpart on Tuesday after data showing a surprise contraction of the domestic economy in August further dampened prospects of another Bank of Canada interest rate hike this year. Canada's gross domestic product declined 0.1 percent in August following flat growth in July, in part due to maintenance shutdowns in major industries, Statistics Canada said. Analysts had forecast an increase of 0.1 percent. The data supported the view that Canadian growth will slow in the third quarter after rapid expansion of the economy in the first half of the year. Perceived chances of another Bank of Canada rate increase by the end of the year slipped to 22 percent from 27 percent before the data, the overnight index swaps market indicated. They were 37 percent before last week's interest rate decision by the central bank, when the benchmark rate was left unchanged at 1 percent. The Bank of Canada had hiked in July and September for the first time in nearly seven years.
At 9:13 a.m. ET (1313 GMT), the Canadian dollar was
trading at C$1.2892 to the greenback, or 77.57 U.S. cents, down 0.5 percent. The currency traded in a range of C$1.2825 to C$1.2915. On Friday, it touched a more than three-month low at C$1.2916. In separate domestic data, producer prices fell by 0.3 percent in September from August as a stronger Canadian dollar helped cut prices for motorized and recreational vehicles.
Canada's October employment report and trade data for September are due on Friday. The U.S. Federal Reserve will make an interest rate decision on Wednesday. Prices of oil, one of Canada's major exports, steadied after a week of gains as the prospect of increasing U.S. exports dampened bullish sentiment.
U.S. crude prices were down 0.06 percent at $54.12 a
barrel. Canadian government bond prices were higher across a steeper
yield curve, with the two-year up 3.5 Canadian cents to yield 1.388 percent and the 10-year rising 8
Canadian cents to yield 1.948 percent. Canadian yields fell further below yields on U.S. Treasuries across much of the curve. The gap between Canada's two-year yield and its U.S. counterpart widened by 1.7 basis points to a spread of -19.2 basis points, its widest since July 11.
(Reporting by Fergal Smith; Editing by Jonathan Oatis)