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* C$ up 1.5 pct as US$ sags on move to riskier assets
* Bonds lower on higher TSX, looming supply concerns
By Jennifer Kwan
TORONTO, Jan 28 (Reuters) - The Canadian dollar rallied 1.5 percent against the U.S. currency on Wednesday, helped by firmness in commodities and weakness in the greenback as investors stepped into riskier assets.
Canadian bond prices were lower across the curve as money flowed into equities with the Toronto's main stock index .GSPTSE up more than 1 percent.
At 9:50 a.m. (1450 GMT), the Canadian dollar was at C$1.2083 to the U.S. dollar, or 82.76 U.S. cents, up from C$1.2263 to the U.S. dollar, or 81.55 U.S. cents, on Tuesday.
The unit touched a high of C$1.2025 to the U.S. dollar, or 83.16 U.S. cents.
"We're seeing a reversal of risk aversion trades so we're seeing a little more risk appetite," said Sal Guatieri, senior economist at BMO Capital Markets.
A rally in equities was prompted by optimism over a Bloomberg report that stated the Federal Deposit Insurance Corp is aiming to take control of a "bad bank" to be set up by the U.S. government to mop up toxic assets from struggling banks. For more details, see: [ID:nN27462853]
On Tuesday, Canada's Conservative government presented a two-year C$40 billion stimulus package to help pull the economy out of recession, laying out plans for a budget deficit for the first time after 11 straight years of surplus. [ID:nN27408307]
The government predicts the plan will boost the economy by 1.4 percent this year and create 190,000 jobs by 2011.
The currency was largely flat after the release of the budget, as many of its details had been widely telegraphed beforehand.
The market will now be looking for indications from the Liberal Party, expected to comment later in the morning, on whether it will support the budget, said Guatieri. If it does not, the minority Conservative government would fall.
The New Democrats and the Bloc Quebecois immediately rejected the plan.
"There is a cloud of uncertainty that may get cleared up ... when the Liberals announce whether they will support the budget or not," he said.
The market is also expected to focus on the U.S. Federal Reserve's monetary policy-setting Federal Open Market Committee for signs of any nonconventional methods to fix economic woes. [ID:nLS150289]
Canadian bond prices were lower as investors moved into riskier assets and as supply concerns weighed.
"The market is digesting the looming onslaught of new government issues over the next one to two years to finance the budget spending," said Guatieri.
"That higher supply just means downward pressure on the bond market."
The government estimated it will run a budget deficit of C$85 billion over five years.
The two-year bond slipped 4 Canadian cents to C$102.55 to yield 1.339 percent, while the 10-year bond was down 7 Canadian cents to C$110.90 to yield 2.907 percent.
The 30-year bond fell 15 Canadian cents to yield 3.682 percent. In the United States, the 30-year Treasury yielded 3.2435 percent. (Reporting by Jennifer Kwan; Editing by Jeffrey Jones)