* Canadian dollar ends at C$1.3535, or 73.88 U.S. cents
* Loonie touches its weakest since Nov. 18 at C$1.3557
* Bond prices higher across the yield curve
By Fergal Smith
TORONTO, Dec 23 (Reuters) - The Canadian dollar weakened to a five-week low against its U.S. counterpart in pre-holiday trading on Friday, pressured by an unexpected contraction in Canada's economy at the start of the fourth quarter.
The country's gross domestic product was down 0.3 percent in October, falling below economists' expectations for no growth, due to widespread weakness in the manufacturing sector and a decline in oil and gas extraction. was the second straight day that weaker-than-expected domestic economic data had weighed on the loonie.
The November inflation report "got the ball rolling" on Thursday, while thin markets amplified pressure on the currency, said Darren Richardson, senior corporate dealer, CanadianForex.
Canada's markets will be closed on Monday and Tuesday in observance of the Christmas Day and Boxing Day holidays.
The Canadian dollar's CAD=D4 official close, which was brought forward, was C$1.3535 to the greenback, or 73.88 U.S. cents, weaker than Thursday's close of C$1.3497, or 74.09 U.S.
The currency's strongest level of the session was C$1.3480, while it touched its weakest since Nov. 18 at C$1.3557.
"The uneven pace of the Canadian economic recovery after the oil shock gives (the Bank of Canada) reason to continue on with (its) dovish message," said Nick Exarhos, economist at CIBC Capital Markets.
Expected policy divergence between the Bank of Canada and the Federal Reserve, which last week raised interest rates and signaled a faster pace of increases in 2017, has widened the spread between Canada's bond yields and U.S. Treasuries, and has weighed on the loonie.
Canada's 2-year yield fell 4.3 basis points further below Treasuries to a spread of -41 basis points. Strategists expect the spread to widen to as much as -80 basis points by the end of 2017. the week, the Canadian dollar weakened 1.4 percent.
Still, the currency has strengthened more than 2 percent since the end of 2015, leaving it on course to rise for the first year since 2012 as oil, one of Canada's major exports, made a partial recovery from a 12-year low in February.
U.S. crude oil futures CLc1 settled 7 cents higher at $53.02 a barrel as the market waited to see how OPEC would manage its planned output cuts with Libya expecting to boost production. O/R
Canadian government bond prices were higher across the yield curve, with the two-year CA2YT=RR up 6 Canadian cents to yield 0.796 percent and the 10-year CA10YT=RR rising 20 Canadian cents to yield 1.797 percent.