January 18, 2012 / 10:33 PM / in 6 years

Canadian dollar strengthens to two-week high on Europe hopes

TORONTO (Reuters) - The Canadian dollar firmed against its U.S. counterpart for the third-straight session on Wednesday as reports of International Monetary Fund efforts to tackle the euro zone debt crisis boosted sentiment.

International developments overshadowed the Bank of Canada’s quarterly Monetary Policy Report and a press conference by Governor Mark Carney in which he made clear he would not raise rates solely to slow the hot housing market.

The IMF is seeking to boost its funding base by $600 billion to lend money to countries struggling with the fallout from the euro zone debt crisis, international financial sources said.

The reports helped global stocks and commodity-linked currencies to move higher.

“What you’re seeing is a fairly steady improvement in sentiment in terms of the global economy,” said Craig Alexander, chief economist at Toronto-Dominion Bank.

“News that the IMF will have additional resources to deal with the fiscal crisis gives people greater comfort there is some underlying safety net that can help catch Europe if there’s a problem.”

The Canadian dollar finished at C$1.0112 to the U.S. dollar, or 98.89 U.S. cents, up from Tuesday’s finish at C$1.0152 to the U.S. dollar, or 98.50 U.S. cents. The currency hit its highest level in two weeks.

Investor risk appetite remained healthy following economic numbers on Tuesday from China that suggested officials may try to boost growth in the near term through more stimulative monetary policy.

“The reason this matters from a Canadian dollar point of view is that the positive news out of China tends to be supportive of commodities and that in turn is positive to the Canadian dollar,” said Alexander.

The currency also firmed below its 100-day moving average, a key level that analysts said could signal a period of greater strength.

Currency traders sifted through the Bank of Canada report and Carney’s comments for clues on the central bank’s next rate move.

Carney gave little indication the central bank would tighten policy soon. But overnight index swaps, which are based on expectations for the overnight rate, showed traders also reduced bets on the likelihood of a rate cut later this year.

Higher rates tend to support currencies by attracting international capital flows.

Canadian government bond prices were mostly down, with the two-year bond falling 5 Canadian cents to yield 0.988 percent. The 10-year bond dropped 36 Canadian cents to yield 1.958 percent.

Editing by Jeffrey Hodgson

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