* C$ ends at 97.18 U.S. cents; up 3.5 pct for qtr
* Currency rises as GDP decline not as bad as feared
* Bonds flat to higher at short end after Carney speech
* Carney cautions on growth; rates seen on hold
(Updates to close, adds quote)
By Jennifer Kwan
TORONTO, Sept 30 (Reuters) - Canada's dollar ended higher
against its U.S. counterpart on Thursday, with investors
bidding up the currency after domestic data showed economic
contraction was not worse than market expectations.
The Canadian dollar CAD=D4 rose as high as C$1.0230 to
the U.S. dollar, or 97.75 U.S. cents, as data showed Canada's
economy contracted for the first time in a year in July on
weakness in manufacturing, construction and retail, adding to
reasons the Bank of Canada could pause its interest rate hike
The currency reacted positively to that as-expected data
because many market players feared the number might come in
lower than consensus estimates after Canada's finance minister
on Wednesday warned on the potential for a negative reading.
"After the finance minister's comments the previous day the
market was fearing a much worse reading," said Matthew Strauss,
senior currency strategist at RBC Capital Markets.
"What we saw was clearly a relief rally."
The currency ended the session at C$1.0290 to the U.S.
dollar, or 97.18 U.S. cents, up from Wednesday's finish at
C$1.0340 to the U.S. dollar, or 96.71 U.S. cents.
It was up 3.6 percent for the month and higher by 3.5
percent for the quarter.
The currency backed away from the session high on Thursday
as equities retreated, likely due to "month-end flows," said
U.S. stocks fell on Thursday as investors took profits from
an exceptionally strong September. [.N].
Toronto stocks also ended the session on a soft note. [.TO]
Canadian government bond prices were flat to higher at the
short end and softer at the long end, reflecting increasing
expectations the Bank of Canada will keep rates on hold in
Markets are pricing in an 82 percent probability the bank
will hold rates steady on Oct. 19, based on a Reuters
calculation using overnight index swaps.BOCWATCH
The move came as Governor Mark Carney said record high
household-debt levels and a soft U.S. export market mean modest
economic growth for Canada in the months ahead, suggesting
further interest rate hikes will likely be delayed.
"There's no immediate impetus for them to raise rates in
October given the state of the economy as well as what's
happening in the U.S.," said Ian Pollick, portfolio strategist
at TD Securities, referring to Carney's comments and the soft
domestic GDP reading.
The two-year bond CA2YT=RR climbed 4 Canadian cents to
yield 1.369 percent, while the 10-year bond CA10YT=RR sank 7
Canadian cents to yield 2.746 percent.
(Reporting by Jennifer Kwan; editing by Jeffrey Hodgson)