TORONTO (Reuters) - The Canadian dollar hovered near a seven-week high against the U.S. dollar and two-year peak against the euro on Wednesday as grim economic data heightened expectations the European Central Bank was about to cut interest rates.
Trading activity was subdued with U.S. markets closed for the Independence Day holiday and investors cautious ahead of policy decisions from the ECB and Bank of England on Thursday, as well as North American jobs data on Friday.
"Everyone in the world is looking for further stimulus and that's why we're at these elevated levels," said John Curran, senior vice president at CanadianForex, who noted that investors will also be paying attention to a Spanish bond auction on Thursday.
Data on Wednesday showed activity in Germany's services sector unexpectedly stagnated in June. And while a contraction in France's services sector eased, business expectations slumped to their lowest level in three years, underlining how bleak conditions in Europe are.
The reports solidified the view that the European Central Bank will cut interest rates to a record low on Thursday in a move that could drive stock markets higher and further lift commodity prices and commodity-linked currencies such as the Canadian dollar.
The Canadian dollar rallied to a two-year high of C$1.2655 versus the single European currency, or 79.02 euro cents, its strongest level since June 2010.
Meanwhile, the BoE is seen launching a third round of monetary stimulus on Thursday, moving to counter a recession and the effects of a worsening debt crisis in the euro zone just two months after calling a halt to the program.
The Canadian currency ended at C$1.0132 versus the greenback, or 98.70 U.S. cents, a tad lower than Tuesday's North American session close of C$1.0125.
"I think we're just seeing a bit of to-ing and fro-ing ahead of the event risks that come up in the next couple days in thin markets with obviously the U.S. being out (on holiday)," said Adam Cole, global head of FX strategy at RBC Capital Markets in London.
The Canadian currency's high against the U.S. dollar on Wednesday was $1.0120, or 98.81 U.S. cents, its strongest level since May 17.
Cole said he expected the Canadian dollar to stick to a narrow range between C$1.0120-C$1.0150 heading into Thursday.
Strategists surveyed in a Reuters poll released on Tuesday forecast the currency will weaken over the next six months before firming to the one-for-one mark with the U.S. dollar, helped by the prospect of central bank easing abroad even as the Bank of Canada looks to tighten monetary policy. <CAD/POLL>
Canadian bond prices crept up across the curve. Canada's two-year government bond rose 3 Canadian cents to yield 1.033 percent, while the benchmark 10-year bond added 27 Canadian cents to yield 1.712 percent.
Editing by Peter Galloway