TORONTO (Reuters) - Canada's dollar hit a 3-1/2 year high against a broadly weaker greenback on Friday, shrugging off uncertainty over Monday's federal election and data that showed Canada's economy shrank in February.
"The fact that the Canadian dollar continues to rally amid a secular decline in the U.S. dollar is of no great surprise," said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"The fact that it was able to withstand a miss on the GDP and ahead of any kind of political uncertainties leading into the election has been more of an indicator of the fundamental support for the currency going forward."
The Canadian dollar fell early in the day as data showed Canada's gross domestic product slipped 0.2 percent in February, reinforcing expectations the central bank will hold interest rates steady until the second half of this year.
The currency finished the week at C$0.9464 to the U.S. dollar, or $1.0566, up from Thursday's North American finish of C$0.9510 to the U.S. dollar. It rose as high as C$0.9450 to the U.S. dollar, or $1.0582, on Friday, its strongest level since November 2007.
Some analysts say it may now target the modern-day high of C$0.9059, or US$1.1039, reached in late 2007.
Strong oil prices and positive U.S. equities lent support, as did second thoughts about the weak February GDP number.
"(The GDP data) doesn't take much away from what's going to be a strong first quarter for the Canadian economy, so any weakness that we see in the Canadian dollar as a result of this number should be relatively short-lived," said David Tulk, chief Canada macro strategist at TD Securities.
Contributing to volatility during the day was end-of-month positioning and thin volumes due to holidays in Britain and Japan.
Looking ahead, currency traders are keeping a close eye on Monday's federal election. The left-leaning New Democrats have closed in on the incumbent Conservatives in the polls just days before the vote.
The unprecedented surge in the polls by the NDP has forced apathetic markets to sit up and take notice of the party's platform, fretting about its plans to raise corporate taxes, spend more and launch a tougher energy policy.
"The only thing I think is going to be market-moving is the election on Monday night. I think the NDP can play a spoiler role in the Canadian dollar rally," said Firas Askari, head of foreign exchange trading at BMO Capital Markets.
"If they are the official opposition then I think people will take some Canadian dollar bets off the table."
Canadian bond prices extended gains across the curve after the GDP data, outperforming U.S. Treasuries.
The two-year bond was up 6 Canadian cents to yield 1.704 percent, while the 10-year bond added 20 Canadian cents to yield 3.200 percent.
Additional reporting by Solarina Ho and Jeffrey Hodgson; editing by Rob Wilson and Peter Galloway