TORONTO (Reuters) - The Canadian dollar ended higher against its U.S. counterpart on Tuesday in volatile dealings, emboldened by a British report that suggested European leaders were making progress on the region's debt crisis.
The euro rallied against the safe-haven U.S. dollar and Japanese yen, and commodity-linked currencies including the Canadian dollar followed, driven by a news report that said France and Germany have agreed to enlarge a euro zone rescue fund.
"Details are sketchy but the story is that they are making some progress on this rescue fund ... and markets are desperate for positive news on the euro," said Shaun Osborne, chief currency strategist at TD Securities.
"This is just another tape bomb that has landed on the markets in relatively late trading here to induce a little more volatility in the day's proceedings."
The Guardian newspaper reported that France and Germany have reached an agreement to increase the euro zone's rescue fund, called the European Financial Stability Facility, to 2 trillion euros from the current 440 billion.
The Canadian currency CAD=D3>, already boosted by higher oil prices and a rally in North American stock markets, surged on the news late in the day.
It ended the North American session at C$1.0144 to the U.S. dollar, or 98.58 U.S. cents, well above Monday's North American session close of C$1.0221 against the U.S. dollar, or 97.84 U.S. cents.
Stronger-than-expected U.S. economic data also helped fuel the market reversal. U.S. producer prices rose at their fastest pace in five months in September as the cost of gasoline surged, but the small gain in core prices suggested the increased price pressure was unlikely to be sustained.
With euro-zone woes as a backdrop all this week ahead of an October 23 summit of European leaders, analysts said the Canadian dollar could be under pressure in the next few sessions.
"I think heading into the end of the week investors are going to turn cautious and likely take some risk off table, so I would expect this nice little run by the Canadian dollar to unfortunately come to a bit of an end later this week," said Blake Jespersen, director of foreign exchange sales at BMO Capital Markets.
Canadian bond prices gave up early gains to end the day mostly lower. The two-year Canadian government bond fell 5.5 Canadian cents to yield 1.017 percent, while the 10-year bond was down 37 Canadian cents to yield 2.331 percent.
Editing by Chizu Nomiyama and Peter Galloway