* Canadian dollar rises 0.7 percent against the U.S. dollar
* Loonie touches strongest level since March 21 at 1.3342
* Price of U.S. oil rise 2.1 percent
* Bond prices fall across the yield curve
TORONTO, March 29 (Reuters) - The Canadian dollar rallied to a one-week high against its U.S. counterpart on Friday as investors reduced bets for a Bank of Canada interest rate cut this year after data showed surprising strength for the domestic economy in January.
The Canadian economy grew by 0.3 percent in January from December, fully offsetting the declines of the last two months, Statistics Canada said. Analysts had forecast a flat month.
Chances of an interest rate cut by December dropped to about 50 percent from nearly 70 percent before the data, the overnight index swaps market indicated.
Adding to support for the loonie, U.S. crude oil futures were up 2.1 percent at $60.56 a barrel, supported by OPEC-led supply cuts and U.S. sanctions against Iran and Venezuela. Oil is one of Canada’s major exports.
At 9:06 a.m. EDT (1306 GMT), the Canadian dollar traded 0.7 percent higher at 1.3345 to the greenback, or 74.93 U.S. cents. The currency touched its strongest intraday level since March 21 at 1.3342.
The loonie was on track to fall 1.3 percent in March. Still, it has advanced 2.2 percent in the first quarter, the second best performance in the G10 after sterling.
Gains for the loonie on Friday came as the latest round of U.S.-China trade talks ended on a positive note, boosting stocks.
Canadian government bond prices were lower across the yield curve, with the two-year down 11.5 Canadian cents to yield 1.553 percent and the 10-year falling 55 Canadian cents to yield 1.626 percent.
The gap between Canada’s 10-year yield and the 3-month T-bill narrowed by 5.7 basis points to a spread of minus 4 basis points. The curve inverted last Friday for the first time since 2007.
Investors trying to work out whether the inversion of the U.S. yield curve signals a looming recession may find clues, but little comfort, in the Canadian bond market, which is less distorted by central bank buying. (Reporting by Fergal Smith; Editing by Jeffrey Benkoe)