* C$ at C$0.9829 vs US$ or $1.0174 * Touches highest level since Oct 18, at C$0.9825, or $1.0178 * C$ outperfoms most major currencies, hits 17-mth high vs yen * Bond prices mostly fall across curve By Solarina Ho TORONTO, Dec 13 (Reuters) - The Canadian dollar touched its strongest level against its U.S. counterpart in two months on Thursday, extending Wednesday's gains following the U.S. Federal Reserve's plan to ease monetary policy further. The Fed mostly met market expectations by saying it would keep buying $45 billion of government bonds each month after its "Operation Twist" program expires, in addition to buying $40 billion a month in agency mortgage-backed securities. "What we're seeing is the continued follow-through to what we saw yesterday. What the Fed's doing is clearly not U.S. dollar-friendly and I think that's translating by default into Canadian dollar strength," said Michael Gregory, senior economist at BMO Capital Markets. At 9:13 a.m. (1413 GMT), the Canadian dollar was trading at C$0.9829 versus the U.S. dollar, or $1.0174, stronger than Wednesday's North American session finish of C$0.9847, or $1.0155. Earlier in the session, the currency touched its strongest level since Oct. 18, trading at C$0.9825, or $1.0178. "Right now, I think you have to believe the Canadian dollar will trend a little bit stronger as the market continues to digest what transpired yesterday, but I think eventually it will run out of steam," said Gregory. Canada's dollar mostly outperformed other major currencies, including the Japanese yen, where it touched its strongest level against the yen since July 8, 2011. A Royal Bank of Canada research note expected the currency to trade between C$0.9815 and C$0.9855 on Thursday. The Canadian dollar held on to gains following a slew of North American data, including rising new home prices and record high personal debt in Canada. In the United States, retail sales rose in November in a sign that steady job creation is adding momentum to consumer spending. Producer prices fell more than expected, according to a government report that showed little inflation pressures in the economy. Fewer Americans filing new unemployment benefit claims last week indicated a steady healing in the labor market. Going forward, uncertainty over whether U.S. lawmakers can come to an agreement to resolve the U.S. fiscal crisis will remain a key risk. "Very near term ... the Canadian dollar is vulnerable to continued worries on the fiscal cliff front. So we could see a temporary reprieve where investors get a little bit worried about the situation, a little bit of uncertainty about how the U.S. economy is going to start 2013," said Gregory. Canadian government debt prices were lower across the curve, tracking U.S. Treasuries, where yields rose after Wednesday's Fed statement. The two-year bond was off 2.5 Canadian cents to yield 1.106 percent, while the benchmark 10-year bond fell 20 Canadian cents to yield 1.781 percent.