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

    By Fergal Smith
    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
    "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
    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
    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
    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)