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TORONTO (Reuters) - The Canadian dollar hit its highest level in more than two weeks against the U.S. dollar on Wednesday, getting a boost from stronger than expected domestic growth data and a move by major central banks to increase liquidity in the global financial system.
The currency touched a session high of C$1.0124 against the U.S. dollar, or 98.78 U.S. cents, its best level since November 14.
Data showed the Canadian economy grew at an annualized rate of 3.5 percent in the third quarter, recovering from a 0.5 percent contraction in the second quarter as Canada felt the economic effects of Japan's earthquake and tsunami.
A Reuters survey of analysts had forecast a rise of 3.0 percent. By contrast, third-quarter real gross domestic product in the United States grew 2.0 percent.
"It's certainly stronger than (the Bank of Canada's) 2 percent growth that they projected in October, however I think their main concern is the external environment," said Paul Ferley, assistant chief economist at Royal Bank of Canada.
"I think it still argues for the bank to keep policy accommodative."
Higher interest rates tend to strengthen currencies by attracting international capital flows, and vice versa.
Canada's primary dealers don't expect the central bank to resume raising interest rates until late next year or 2013, and traders pared back bets of future interest rate cuts following the GDP data.
By 11:01 a.m., the Canadian dollar had retreated to C$1.0167 against the U.S. dollar, or 98.36 U.S. cents, but was still much higher than Tuesday's North American close of C$1.0303 to the U.S. dollar, or 97.06 U.S. cents.
The currency was already on firmer ground heading into the GDP report, after global central banks - including the Bank of Canada - announced a co-ordinated move to keep funds flowing through financial markets that are being rocked by Europe's escalating debt crisis.
The announcement fueled equity markets' appetite for risk as investors dumped the safe-haven U.S. dollar, lifting currencies such as the Australian, New Zealand, and Canadian dollars, as well as the euro.
Blake Jespersen, director of foreign exchange sales at BMO Capital Markets, said that part of the big move on Wednesday was related to end-of-month hedging activity and portfolio rebalancing, which was so far proving to be U.S.-dollar negative.
"This starts to bring parity back into play. A lot of talk already about parity and the order boards are starting to fill up around that level again."
However, he noted that investors may be tempted to take profits after the Canadian dollar's sharp rally.
"I think C$1.0080 would be a decent level to consider either taking back U.S. dollar shorts or taking an outright long U.S. dollar view," Jespersen said.
Canadian government bond prices retreated across the curve, tracking U.S. Treasuries lower amid lowered safe-haven appetite.
The two-year bond fell 5 Canadian cents to yield 1.019 percent, while the 10-year bond dropped 37 Canadian cents to yield 2.166 percent.
Reporting by Claire Sibonney; editing by Rob Wilson