CANADA FX DEBT-C$ climbs as Poloz comments, GDP beat support rate hike bets

    * Canadian dollar rises 0.5 percent against the greenback
    * Canada's economy grows 0.2 percent in July
    * Bond prices trade mixed across a flatter yield curve
    * Canada-U.S. 2-year spread narrows by 2.6 basis points

    TORONTO, Sept 28 (Reuters) - The Canadian dollar
strengthened against the greenback on Friday after a speech by
Bank of Canada Governor Stephen Poloz and  faster-than-expected
growth of the domestic economy reinforced expectations of an
interest rate hike in October.
    Canada's economy grew 0.2 percent in July, stronger than the
0.1 percent increase that analysts had forecast, Statistics
Canada data indicated.             
    Chances of an interest rate increase next month by the Bank
of Canada held at nearly 80 percent after the data, the
overnight index swaps market indicated.           
    The central bank will continue to raise interest rates
gradually, Governor Stephen Poloz said on Thursday, stressing
that despite economic uncertainties, the bank did not want to
let inflation momentum build.             
    One important unknown was the fate of talks to renegotiate
the North American Free Trade Agreement, Poloz said.
    Canada on Thursday shrugged off U.S. President Donald
Trump's criticism that talks to modernize NAFTA were moving too
slowly and made clear it had to keep negotiating as long as
there was a chance of success.             
    Trump has already concluded an agreement with Mexico, the
third country in NAFTA, and is threatening to leave out Canada
unless it signs up by Sunday.
    At 9:17 (1317 GMT), the Canadian dollar          was trading
0.5 percent higher at 1.2976 to the greenback, or 77.07 U.S.
cents, outperforming all other G10 currencies.
    The loonie, which on Thursday hit its weakest in more than
two weeks at 1.3083, traded in a range of 1.2971 to 1.3050. For
the week, it is on track to fall 0.4 percent.
    The U.S. dollar        climbed against a basket of other
major currencies as Italy's decision to set a higher than
expected budget deficit put pressure on the euro.             
    The price of oil, one of Canada's major exports, steadied as
U.S. sanctions on Tehran squeezed Iranian crude exports. U.S.
crude        prices were down 0.1 percent at $72.07 a barrel.
    Canadian government bond prices were mixed across a flatter
yield curve, with the two-year            down 1 Canadian cent
to yield 2.206 percent and the 10-year             rising 8
Canadian cents to yield 2.414 percent.
    The gap between the 2-year yield and its U.S. equivalent
narrowed by 2.6 basis points to 60.9 basis points in favor of
the U.S. bond.