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TORONTO (Reuters) - Canada's dollar had its heftiest gain in nearly three weeks against the U.S. dollar on Tuesday, helped by encouraging U.S. and German economic data, a successful Spanish bond auction and surging stock markets.
The currency, equities and other risk assets were also lifted at the expense of the safe-haven U.S. dollar by growing expectations that European banks will borrow large amounts from the European Central Bank at its inaugural three-year offer on Wednesday and use some of the money to buy government debt.
"Clearly it's been a strong day for equities and the U.S. dollar has been backpedalling virtually all day," said Jack Spitz, managing director of foreign exchange at National Bank Financial. "Price action has been short-covering in the euro and as a result the Canadian dollar has rallied."
Wall Street jumped 3 percent on Tuesday as traders eyed a seasonal "Santa" rally into the yearend. .N
"Strong correlations exist between equities and the Canadian dollar. The 3 percent pickup in the S&P has inspired some bids into the Canadian dollar as well," Spitz said.
The Canadian dollar ended the North American session at C$1.0303 to the U.S. dollar, or 97.06 U.S. cents, up sharply from Monday's close at C$1.0387 versus the greenback, or 96.27 U.S. cents.
Canadian inflation data briefly interrupted the currency's rise in the morning. Year-on-year inflation held steady at 2.9 percent in November, and core inflation was at 2.1 percent, slightly undershooting forecasts.
Overnight index swaps, which trade on expectations for the central bank's key policy rate, showed that traders scaled back bets on a Bank of Canada rate cut in 2012 slightly after the inflation figures.
"We saw the dollar weaken slightly in the aftermath of the report, since core was a little bit light, but the fact is core is still above the bank's target, and it looks as if core inflation is running above what they forecast for the fourth-quarter, so I'd hardly say this is an excuse for the bank to ease," said Doug Porter, deputy chief economist at BMO Capital Markets.
Figures on Tuesday showed U.S. housing starts and building permits jumped to a 1-1/2 year high in November as demand for rental apartments rose, suggesting the housing market was entering a tentative recovery.
Events in Europe also defied weak expectations as German business morale rose sharply in December, underscoring the resilience of Europe's biggest economy, while a Spanish bond auction drove down short-term borrowing costs.
Looking to the rest of the week, Canadian economic data, including October retail sales on Wednesday and gross domestic product for the same month on Friday, may further support the currency.
National's Spitz noted resistance for the Canadian dollar around C$1.0280, followed by C$1.0235, which would open up the way toward C$1.0150.
Canadian government bond prices fell across the curve, tracking U.S. Treasuries down as hopes for European bank funding and stronger economic data reduced demand for safe haven debt.
The two-year bond was down 9 Canadian cents to yield 0.883 percent, while the 10-year bond dropped 84 Canadian cents to yield 1.931 percent. The 30-year bond retreated C$1.28 to yield 2.465.
Additional reporting By Euan Rocha; Editing by Peter Galloway