* Canadian dollar at C$1.2557, or 79.64 U.S. cents
* Loonie hit weakest intraday since Aug. 18 at C$1.2663
* Bond prices lower across a flatter yield curve
* Canada-U.S. 2-year spread hits narrowest in one month
By Fergal Smith
TORONTO, Aug 31 (Reuters) - The Canadian dollar rallied on Thursday against the U.S. dollar, recovering from a nearly 2-week low, after data showing Canada's economy expanded at the fastest pace in nearly 6 years boosted chances of another interest rate hike from the Bank of Canada.
Gross domestic product grew at an annualized 4.5 percent pace, handily topping forecasts for 3.7 percent, as consumers continued to spend and energy exports rose, data from Statistics Canada showed. Separate data showed GDP grew 0.3 percent in June. one more (interest rate) hike from the Bank of the Canada wasn't a done deal, this makes it a much easier case," said Andrew Kelvin, senior rates strategist at TD Securities.
Chances of a rate hike as soon as next week climbed to one-in-three from around 20 percent before the data, while investors see a greater-than 80 percent chance of a hike by October, data from the overnight index swaps market shows. BOCWATCH
The central bank's policy rate sits at 0.75 percent, after it was raised in July for the first time in nearly seven years.
Adding to support for the loonie, U.S. crude oil prices rebounded after being pressured this week by storm Harvey, which knocked out almost a quarter of U.S. refineries. crude CLc1 prices were up 1.26 percent at $46.54 a barrel.
At 9:22 a.m. ET (1322 GMT), the Canadian dollar CAD=D4 was trading at C$1.2557 to the greenback, or 79.64 U.S. cents, up 0.5 percent.
The currency's strongest level of the session was C$1.2554, while it touched its weakest since Aug. 18 at C$1.2663.
The U.S. dollar .DXY rose against a basket of currencies, although some gains were pared after data showed U.S. consumer spending rose slightly less than expected in July and annual inflation increased at its slowest pace since late 2015. government bond prices were lower across a flatter yield curve, with the two-year CA2YT=RR price down 8 Canadian cents to yield 1.28 percent and the 10-year CA10YT=RR falling 30 Canadian cents to yield 1.871 percent.
The gap between the Canadian 2-year yield and its U.S. equivalent narrowed by 4.8 basis points to a spread of -4.9 basis points, its narrowest since July 31.