January 23, 2012 / 3:53 PM / in 6 years

Canadian dollar rises on upbeat outlook for euro zone

TORONTO (Reuters) - The Canadian dollar firmed against its U.S. counterpart on Monday as oil and other commodity prices rose on improved optimism for a Greek debt restructuring deal, which was seen as helping to stabilize the euro zone financial crisis.

Germany and France pressed on Monday for a rapid deal between Greece and its private creditors that would cut its soaring debt to sustainable levels and said they were committed to sealing a new bailout for Athens by March to avert a default.

A messy default by Greece could derail the global rally in equities markets so far this year. On Monday, the Toronto Stock Exchange's S&P/TSX composite index .GSPTSE was up 1 percent.

"The Canadian dollar is adrift in a sea of European headlines," said Michael O'Neill, vice-president of foreign exchange trading at RJOFX Canada. "As long as the market is tepidly into risk-seeking, the euro's recovering and squeezing some short (positions), then the Canadian dollar is getting benefit by default."

O'Neill said the euro's move to a three-week high against the greenback was exaggerated based on thin Asian trade thanks to the week-long Lunar New Year holiday and investor caution ahead of the U.S. Federal Reserve's two-day policy meeting starting on Tuesday.

The Fed could take the historic step of announcing an explicit target for inflation as part of its new communication strategy, which could signal where U.S. interest rates are headed longterm. Canadian rates, and the currency, could be affected by any change.

"It's a good reason to stay home and maybe overreact on any Greek headlines," O'Neill added.

The Canadian currency finished the session at C$1.0074 to the U.S. dollar, or 99.27 U.S. cents, up from Friday's finish of C$1.0132 to the U.S. dollar, or 98.70 U.S. cents. It touched a near seven-week high at C$1.0052, or 99.48 U.S. cents.

"If we can get through that C$1.0050 level we could see parity this week," said Blake Jespersen, managing director of foreign exchange sales at BMO Capital Markets.

Canada's dollar last hit parity with the greenback on November 1, but has traded within an increasingly narrow range since Christmas as fears about Europe's debt crisis have countered North American economic optimism.

Market sentiment was also helped after Italian government bond yields fell on Monday, with traders citing European Central Bank buying of short-dated Italian bonds in the secondary market.

Canadian government bond prices were lower across the curve with the two-year bond falling 3 Canadian cents to yield 1.058 percent. The 10-year bond dropped 27 Canadian cents to yield 2.092 percent.

Editing by Rob Wilson

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