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TORONTO (Reuters) - The Canadian dollar started 2012 on a positive note on Tuesday, climbing to its strongest level against the U.S. dollar in nearly four weeks, as rising oil prices and decent global economic data boosted investor risk appetite.
The risk-on mood in markets was spurred by signs of improvement in China's manufacturing sector and a surprise drop in German unemployment early in the day, and then reinforced by U.S. construction and factory data signaling the economic recovery was gaining steam.
Meanwhile, tensions between Iran and the West lifted U.S. crude oil close to $103 a barrel, providing an extra boost to Canada's commodity-influenced currency.
"One thing to keep in mind is that while oil has done very well, gas is certainly lagging, and even though the China PMI data was okay there's still a significant minority of people expecting an eventual slowdown in China and a chance that it may accelerate," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.
"So I'd say that the Canadian dollar feels a little bit overextended than say the backup in bond yields, which may still have a little bit of room to go."
The Canadian dollar ended the North American session at C$1.0110 to the U.S. dollar, or 98.91 U.S. cents, up from Friday's close at C$1.0170 versus the greenback, or 98.33 U.S. cents.
The currency strengthened to as much as C$1.0076 against the safe-haven greenback, or 99.25 U.S. cents, during the session, putting parity - last seen in November - back within striking distance.
Canadian financial markets were closed on Monday for the New Year holiday and liquidity was still light on Tuesday as many market players chose to extend the long weekend.
Investors were also more hopeful that the U.S. Federal Reserve could ease monetary policy further after minutes from the Fed revealed that several officials believed economic conditions could "well" warrant it.
The Fed release drove the euro to a global session high on the U.S.-dollar-negative implications, but Chandler cautioned that the biggest hurdle for markets is still Europe's debt crisis.
RBC noted near-term U.S. dollar support at C$1.0051.
Michael O'Neill, vice-president of foreign exchange trading at RJOFX Canada said the Canadian currency should continue its upward climb.
"Canada is a nice little uptrend channel from pretty much the middle of December on the short-term chart. The channel remains intact at C$1.0190 to the top and C$1.0030 on the bottom so Canada should keep grinding higher in the confines of this," O'Neill said.
The Canadian dollar was a mediocre performer among G10 currencies in 2011, down 2.2 percent after a roller-coaster second half of the year, during which sentiment was buffeted by the euro zone debt crisis. In 2010, the currency had a 5.7 percent gain against its U.S. counterpart.
The Canadian data calendar fills up towards the end of the week with industrial product, raw material prices and Ivey PMI on Thursday and employment numbers on Friday, while investors will also be paying close attention to U.S. nonfarm payrolls.
Canadian bond prices retreated, outperforming U.S. Treasuries across much of the curve in thin trade as portfolio managers tidied up positions at the start of the year. <US/>
"The U.S. did get a fairly decent reading from the ISM earlier today but they also rallied a little bit harder to end last year, so I'd argue that it was primarily sort of positioning and a rewind of the sharp moves that we saw in the final week of the year," added Chandler.
The two-year bond lost 6 Canadian cents to yield 0.981 percent, while the 10-year bond slipped 43 Canadian cents to yield 1.992 percent
Reporting by Claire Sibonney; editing by Rob Wilson