TORONTO (Reuters) - The Canadian dollar touched its strongest level in nearly three months against its U.S. counterpart on Tuesday, boosted by investor hopes that the European Central Bank will support bond markets in the struggling euro zone.
Markets have enjoyed a strong run on expectations the ECB will step in and buy bonds to ease pressure on Spain and Italy, albeit under strict conditions that have yet to be spelled out. Traders have upped their euro positions after ECB President Mario Draghi warned last week not to bet against the single currency.
With markets closed in Canada on Monday, the Canadian dollar picked up where it left off on Friday, rising after strong U.S. employment numbers fueled a broad commodities rally.
"We're still in that post-payrolls afterglow," said Andrew Kelvin, senior fixed-income strategist at TD Securities. "People aren't as worried about Europe for the moment, because they have some faith that Draghi is going to do something that will at least buy time."
On Tuesday, the Canadian currency touched a session high at C$0.9962 against the greenback, or $1.0038, its strongest level since May 11.
The Australian dollar also rose to its highest in more than four months on Tuesday after the central bank kept interest rates unchanged at 3.5 percent and dropped few hints it was in a hurry to ease again.
At 1:10 p.m. EDT (1710 GMT), the Canadian dollar was changing hands at C$0.9968, or US$1.0032, up from Friday's close at C$1.0019, or 99.81 U.S. cents.
Investors are also watching to see if the Federal Reserve will take any fresh measures to bolster the U.S. economy. Many analysts expect the Fed could launch a third round of bond-buying, known as quantitative easing, when it next meets in mid-September.
"If the market continues to believe that the Fed is going to go down the QE3 road in September, that will continue to support risk and the Canadian dollar," said Adam Cole, global head of foreign exchange strategy at Royal Bank of Canada in London.
Cole said the Canadian currency would likely stay within a range between a high of C$0.9950 against the greenback, or US$1.0050, and its low from last week at C$1.0085, or 99.16 U.S. cents.
The improved risk sentiment boosted Canadian bond yields, which recently hit record lows. The yield on Canada's benchmark 10-year bond touched 1.849 and the rate on the two-year bond climbed to 1.165 percent - both at their highest levels since May 29, according to Thomson Reuters data.
"There's some upward momentum in rates," said Kelvin. "The global economy looks a little less precarious and people are piling into risk."
Editing by Gary Crosse