* Canadian dollar falls on weak GDP report
* Economy shrinks for first time in five years
* Bonds rise on prospect of another interest rate cut
By John McCrank
TORONTO, May 30 (Reuters) - The Canadian dollar fell against the U.S. dollar on Friday after data showed that the Canadian economy unexpectedly shrank for the first time in five years during the quarter.
Domestic bond prices rose on the gross domestic product report, as it may have cemented another interest rate cut by the Bank of Canada.
At 9:48 a.m. (GMT), the Canadian dollar was at US$1.0070, valuing a U.S. dollar at 99.30 Canadian cents, down from US$1.0110, or 98.91 Canadian cents, at Thursday's close.
Canada's GDP fell an annualized 0.3 percent in the first quarter, according to data from Statistics Canada.
Analysts surveyed by Reuters had, on average, expected annualized first-quarter real growth of 0.3 percent.
While most of the decline was due to a steep drawdown in inventories during the quarter, it points to a continuation of the Bank of Canada's easing cycle, said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"As far as monetary policy is concerned, it leaves the door wide open for at least one more cut by the Bank of Canada, whether it is in June or July remains to be seen."
The weaker report may reverse the slightly positive bias that the Canadian dollar has seen recently as a result of strong prices for the Canadian commodities exports, said Strauss.
"We've seen already some weakness in the market and I think that it should have a negative impact on the Canadian dollar."
BOND PRICES RISE
Bond prices rose on the weak report and its implications for the Bank of Canada going forward.
"It's almost a sure thing that the weak GDP numbers will cement the Bank of Canada rate cut next month," said Sheldon Dong, fixed income strategist at TD Waterhouse Private Investment.
"I guess there were a few people who were doubting that the Bank of Canada would continue to cut, but I don't know how anyone could sugar-coat the numbers. They were pretty bad."
The Bank of Canada has cut its key lending rate by 150 basis points since December, to 3 percent, in an attempt to spur growth in the face of the U.S. economic downturn.
The overnight Canadian LIBOR rate LIBOR01 was at 3.1917 percent, up from from 3.0800 percent on Thursday.
Thursday's CORRA rate CORRA= was 2.9823 percent, down from 2.9975 percent on Wednesday. The Bank of Canada publishes the previous session's rate at around 9 a.m. daily.
The two-year bond rose 20 Canadian cents to C$101.44 to yield 3.001 percent. The 10-year bond climbed 20 Canadian cents to C$102.33 to yield 3.693 percent.
The yield spread between the two- and 10-year bond was 69.2 basis points, up from 61.3 at the previous close.
The 30-year bond gained 19 Canadian cents to C$114.54 for a yield of 4.135 percent. In the United States, the 30-year treasury yielded 4.710 percent.
The three-month when-issued T-bill yielded 2.66 percent, down from 2.70 percent at the previous close. (Reporting by John McCrank; Editing by Scott Anderson)