CANADA FX DEBT-C$ gains as recovering domestic economy set to keep BoC sidelined

 (Adds strategist quotes and details on activity, updates
    * Canadian dollar rises 0.2% against the greenback
    * Canadian manufacturing activity contracts for 3rd straight
    * Canadian bond prices dip across much of the yield curve
    * Canada's 2-year yield touches a one-month high at 1.504%

    By Fergal Smith
    TORONTO, July 2 (Reuters) - The Canadian dollar edged higher
against its U.S. counterpart on Tuesday, paring some of Monday's
decline, as investors bet that the Bank of Canada would be slow
to follow expected interest rate cuts from the U.S. Federal
    The U.S. dollar        dipped against a basket of major
currencies as optimism about U.S.-China trade negotiations
dwindled and as U.S. President Donald Trump turned his attention
to the European Union with threats of additional tariffs.
    Trade frictions are part of the growing risks to the U.S.
economy that prompted the Fed in June to signal interest rate
cuts starting as early as this month. 
    Money markets see at least two rate cuts from the Fed by the
end of the year, while chances of just one easing from the Bank
of Canada over the same period are at 35%.           
    "We get the sense that the bank will be a little bit more
reluctant to chase the Fed in terms of cuts," said Mazen Issa, a
senior FX strategist at TD Securities. "The cyclical drag in the
Canadian economy has ebbed since the first quarter."
    Canadian manufacturing activity contracted for the third
consecutive month in June, but the pace of decline lost some
momentum, the IHS Markit Canada Manufacturing Purchasing
Managers' index showed.             
    On Friday, data showed faster-than-expected growth in the
Canadian economy in April.              
    Canada's trade data for May is due on Wednesday and the June
employment report is due on Friday.
    At 4:26 p.m. (2026 GMT), the Canadian dollar          was
trading 0.2% higher at 1.3111 to the greenback, or 76.27 U.S.
cents. The currency, which touched on Friday a near eight-month
high at 1.3060, traded in a range of 1.3097 to 1.3139.
    Recent strength for the loonie has come as investors cut
their bearish bets on the currency to the lowest since December
last year. As of June 25, net short positions had tumbled to
14,790 contracts from 38,071 in the prior week, according to
data from the U.S. Commodity Futures Trading Commission and
Reuters calculations.             
    Canadian government bond prices edged lower across much of
the yield curve as the market reopened following the Canada Day
holiday. The two-year            fell 1.5 Canadian cents to
yield 1.482% and the 10-year             was down 3 Canadian
cents to yield 1.469%.
    The two-year yield touched its highest intraday since May 29
at 1.504%.

 (Reporting by Fergal Smith; Editing by Jonathan Oatis and Peter