* C$ ends at C$0.9975 vs U.S. dollar, or $1.0025 * Currency touches strongest level since May 11 * Bonds sink across the curve By Jennifer Kwan TORONTO, Aug 7 (Reuters) - Canada's dollar touched its strongest level in nearly three months against its U.S. counterpart on Tuesday, buoyed in part by investor hope Europe will take measures to resolve the region's debt crisis. The currency soared to C$0.9962 against the greenback, or $1.0038, its loftiest level since May 11 as global markets edged higher on expectations the European Central Bank will step in and buy bonds to ease pressure on Spain and Italy, albeit under strict conditions that have yet to be spelled out. The knock-on effect helped to push up the price of oil and base metals. "I think central bank action and central bank commitment is crushing volatility. With volatility so low that opens the door to risk trades and that's positive for a currency like Canada," said Camilla Sutton, chief currency strategist at Scotiabank. As well, 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. Sutton said the currency was also supported by domestic data on Tuesday that showed the pace of purchasing activity in the Canadian economy in July rose to its highest in four months. "Though a volatile series, it was still stronger than expected so it was greeted with welcome arms by the market," Sutton said of the Ivey PMI data. On Tuesday, Canada's dollar ended at C$0.9975 against the greenback, or $1.0025, up from Friday's close at C$1.0019, or 99.81 U.S. cents. The currency largely outperformed its major currency peers including the yen and the New Zealand and Australian dollars. Setting the stage for a North American risk rally, the Australian dollar 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. 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. BONDS SINK 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, its highest since June 11, while the rate on the two-year bond climbed to 1.173 percent, its highest since May 23, according to Thomson Reuters data. The move was similar in the United States where U.S. Treasury debt prices slid on Tuesday, driving benchmark yields to a month high as investors turned to riskier assets in hopes that global policymakers will act to help resolve the euro zone's debt crisis. "There's some upward momentum in rates," said Andrew Kelvin, senior fixed-income strategist at TD Securities. "The global economy looks a little less precarious and people are piling into risk."