* 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 campaign. [ID:nN30434455]
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. [ID:nN2996628].
"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 Strauss.
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 October.
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. [ID:nN30286204]
"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)