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TORONTO (Reuters) - The Canadian dollar strengthened on Tuesday as traders bet major central banks, especially the U.S. Federal Reserve, would intervene to stimulate the global economy and relieve the pressure of the euro zone debt crisis.
Canada's currency rose as high as C$1.0166 to the U.S. dollar, its strongest since May 22, as Canada's main stock index rallied to its highest point since May 10 and U.S. equities rose. .TO .N
"In general, I think it's the expectation of continued stimulus by the Fed. Clearly they see that there's some headwinds in the global economy," said Blake Jespersen, managing director of foreign exchange sales at BMO Capital Markets.
Greg Moore, currency strategist at TD Securities, said the Canadian dollar and its G10 peers were lifted in anticipation of Wednesday's policy announcement from the Fed's Open Market Committee.
The euro rose against the dollar and stock markets gained as investors bet the Fed will unveil more stimulus to support a flagging recovery. <MKTS/GLOB> <FRX/>
Analysts expect the Fed to extend long-term bond-buying through "Operation Twist" by a few months from the current deadline in June. Moore said he was not forecasting a new round of quantitative easing, but the market could be expecting one.
"Just an extension of Operation Twist might actually see a little bit of a retraction in risk assets tomorrow," he said. "If the options are Operation Twist or full on QE, then I think anything less than full-on QE might actually disappoint the market."
The Canadian dollar closed at C$1.0182 versus the U.S. dollar, or 98.21 U.S. cents, compared with Monday's close at C$1.0241, or 97.65 U.S. cents.
A European Union official said international lenders are open to renegotiate the terms of Greece's bailout deal because circumstances have changed, further boosting the euro against the greenback. IDnL5E8HJBFJ
A surprise fall in British inflation to its lowest point in two and a half years also raised hopes that the Bank of England will take steps to support the UK's economy. ID:nL5E8HJ554]
Canadian bond prices were mostly lower across the curve. Canada's two-year bond fell 13 Canadian cents to yield 1.042 percent, while the benchmark 10-year bond fell 44 Canadian cents to yield 1.761 percent.
Editing by Dave Zimmerman,; Peter Galloway and Dan Grebler