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TORONTO (Reuters) - Canada's dollar touched a six-week high against the U.S. currency on Tuesday, boosted by a rally in oil prices and growing expectations central banks outside of Canada will take more action to prop up the world economy.
The worsening deceleration in global manufacturing activity around the world - highlighting the drag on global growth from the euro zone debt crisis - has contributed to the view that central banks, including the U.S. Federal Reserve, will have to respond.
The belief that the Fed will deliver a third round of quantitative easing, or buying assets with freshly created money, gained momentum on Monday, when data showed the giant U.S. manufacturing sector contracted for the first time in nearly three years in June.
"People are expecting more in the way of QE3 now, potentially as soon as August, and that's one of the factors we think that is preventing more of an erosion of risk appetite," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets.
"If they do go ahead and provide relief on that front, that makes for a better sort of longer-run outlook in terms of the (Canadian) currency and maybe underpins some commodity prices as well."
The Canadian dollar typically strengthens when commodity prices rise and the global growth outlook improves because the country is a major exporter of natural resources.
The Canadian currency closed C$1.0125 versus the U.S. dollar, or 98.77 U.S. cents, after earlier embracing a high of C$1.0121, or 98.80 U.S. cents, its loftiest level since May. 17.
On Friday, the North American session closed at C$1.0181 to the greenback, or 98.22 U.S. cents. Canadian stock and bond markets were closed on Monday for the Canada Day long weekend, as were domestic trading desks at Canadian banks.
Greg Moore, foreign exchange strategist at TD Securities, said the Canadian dollar rally on Tuesday was further positive reaction to pledges made by European Union leaders late last week.
Euro zone leaders agreed to let their rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states.
The agreement helped push the Canadian currency up more than 1.5 percent, while U.S. and global stocks notched gains of 2 percent or more. Moore said Tuesday's rally was also on the back of strong oil prices.
U.S. crude oil futures shot up more than 4 percent on Tuesday, as tensions over Iran's threat to block the Strait of Hormuz shipping lane and its testing of missiles capable of hitting Israel sparked supply concerns. <O/R>
On the technical front, Moore said if the currency breaks through the 200-day moving average, currently about C$1.0120, it could return to the 100-day moving average around C$1.0052.
In other news, Canada's currency is seen weakening over the next six months before firming to the one-for-one mark with the U.S. dollar, a Reuters poll showed, helped by the prospect of central bank easing abroad even as the Bank of Canada looks to tighten. <CAD/POLL>
Canadian bond prices were mostly lower across the curve with Canada's two-year government bond down 3 Canadian cents to yield 1.042 percent, while the benchmark 10-year bond slipped 8 Canadian cents to yield 1.745 percent.
Additional reporting by Claire Sibonney; Editing by Jeffrey Hodgson