CORRECTED-CANADA FX DEBT-C$ rallies near 3-month high on ECB hopes

(Corrects amount of time since bond yields have hit current
    * C$ hits C$0.9962 vs U.S. dollar, or US$1.0038
    * Strongest level since May 11
    * Canadian bond yields rise

    By Jon Cook
    TORONTO, Aug 7 (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
    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
    "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.
    The improved risk sentiment lifted Canadian bond yields,
which had recently hit record lows. The yield on Canada's
benchmark 10-year bond touched 1.849 percent, the
highest level since June 11. The rate on the two-year bond
 climbed to 1.173 percent, the highest since May 23.
    "There's some upward momentum in rates," said Kelvin. "The
global economy looks a little less precarious and people are
piling into risk."
 ($1=$1 Canadian)

 (Editing by Gary Crosse)