C$ pares monthly decline as rate hike bets climb

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Canadian dollar gains 0.2% against the greenback

Canadian first-quarter GDP increases 3.1%

Price of U.S. oil settles nearly 2% lower

Canada-U.S. 2-year spread narrows by 4.5 basis points

Adds details throughout

By Fergal Smith

TORONTO, May 31 (Reuters) -The Canadian dollar strengthenedagainst its U.S. counterpart on Wednesday as data showing the domestic economy grew stronger than expected in the first quarter bolstered bets for another interest rate hike by the Bank of Canada.

Canada's economy expanded at an annualized rate of 3.1% in the first quarter, eclipsing forecasts for an increase of 2.5%, and likely accelerated further in April.

"Certainly a beat on GDP and that is moving the needle on rate hike odds for next Wednesday's (Bank of Canada)meeting," said Michael Goshko, senior market analyst at Convera Canada.

Money markets see a roughly 40% chance that the BoC will hike next week for the first time since January, up from 28% before the data. 0#BOCWATCH

The Canadian dollarCAD= was trading 0.2% higher at1.3575to the greenback, or 73.66U.S. cents, recovering after it touched itsweakest intraday level since Friday at 1.3651.

For the month, it was down 0.2%, its second straight month of modest declines.

The gain on Wednesday for the loonie came despite losses on Wall Street and further volatility in the price of oil, one of Canada's major exports.

U.S. crude oil futures CLc1 settled nearly 2% lower at $68.09 a barrel, pressured by gains for the U.S. dollar against a basket of major currencies and worries about the demand outlook after weak data from top oil importer China.

Canadian government bond yields were lower across the curve, but the move was less than for U.S. Treasuries.

The 2-year CA2YT=RR eased 4.8basis points to 4.210%, while the gap between it and the equivalent U.S. rate narrowed by 4.5basis points to about 17 basis points in favor of the U.S. note.

Reporting by Fergal Smith, editing by Deepa Babington


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