CANADA FX DEBT-C$ weakens as GDP data further cools rate hike prospects

    * 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
    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)