CANADA FX DEBT-C$ dives briefly, then firms as greenback takes a hit

* Canadian dollar at C$1.2945 or 77.25 U.S. cents
    * Bond prices higher across the maturity curve

    TORONTO, July 31 (Reuters) - The Canadian dollar was firmer
against its U.S. counterpart on Friday after figures that showed
the Canadian economy shrank in May for the fifth straight month
were overshadowed by U.S. data that weakened the greenback. 
    The loonie flirted briefly with its weakest levels in more
than a decade following the Canadian gross domestic product
data, the latest sign the country was likely in recession in the
first half of the year.
    The U.S. dollar fell against a basket of major currencies
after figures showed employment costs rose less than forecast in
the second quarter, recording the smallest increase in 33 years,
which pared bets the Federal Reserve will resume raising
interest rates later this year. 
    * At 9:23 a.m. EDT (1323 GMT), the Canadian dollar 
was at C$1.2945 to the greenback, or 77.25 U.S. cents, stronger
than the Bank of Canada's official close of C$1.3010, or 76.86
U.S. cents, on Thursday. 
    * This was well off the C$1.3099, or 76.34 U.S. cents,
touched immediately after the Canadian GDP numbers were
released, a level just shy of being the currency's weakest since
2004. The loonie stayed weaker against other major currencies,
    * Canada's economy unexpectedly shrank by 0.2 percent in May
from April. It is estimated to have contracted by an annualized
0.6 percent in the first quarter because of the oil price crash.
That stands in contrast to the United States, where growth rose
by 0.6 percent in the first quarter and by 2.3 percent in the
    * In the United States, the Employment Cost Index, the
broadest measure of labor costs, edged up 0.2 percent. 
    * Putting more pressure on the loonie was another decline in
 prices for oil, a major Canadian export, on supply glut worries
after the OPEC cartel indicated there would be no cuts in
production. U.S. crude prices were down 0.64 percent at
$48.21 a barrel, while Brent crude lost 0.34 percent to
    * Canadian government bond prices were higher across the
maturity curve, with the two-year price up 9.5
Canadian cents to yield 0.406 percent and the benchmark 10-year
 rising 58 Canadian cents to yield 1.431 percent.
    * The Canada-U.S. two-year bond spread narrowed to -26.3
basis points, while the 10-year spread narrowed to -77.2 basis

 (Reporting by Solarina Ho; Editing by Peter Galloway)