* C$ ends session at C$0.9869, or $1.0133
* C$ peaked at C$0.9848, highest since May, 2008
* Consolidated Thompson bid helps sentiment
* Bond prices fall across the curve as risk appetite rises (Updates, adds details, comments)
By Solarina Ho
TORONTO, Jan 12 (Reuters) - The Canadian dollar broke through a key resistance level to hit a 2-1/2 year high against its U.S. counterpart on Wednesday, as a positive development in Europe's debt crisis helped lift higher-yielding currencies.
The Canadian dollar strengthened along with commodity prices and global equity markets after healthy demand for Portuguese bonds temporarily eased worries over the region's debt problems. Oil, copper and gold prices all rose. [O/R] [MET/L] [GOL/]
Canada is a major producer of natural resources and its currency often rises as commodity prices gain. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a graphic on the link between the Canadian dollar and commodity prices, see: r.reuters.com/tyr95r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The Canadian dollar CAD=D4, which climbed for the 12th straight session, peaked at C$0.9848 to the U.S. dollar, or $1.0154 earlier in the session, its best level since May 2008. [CAD/]. Analysts said the move through last week's high of C$0.9889 helped trigger the jump.
"We had one of those risk-on days," said RBC Capital Markets currency strategist David Watt.
"It was largely oriented toward the risk sentiment and the events that were happening in Europe."
News late on Tuesday that U.S.-based Cliffs Natural Resources CLF.N agreed to buy Canada's Consolidated Thompson Iron Mines CLM.TO for C$4.07 billion was also seen as supportive. Acquisitions of Canadian companies by foreigners tend to strengthen the Canadian dollar.
"It adds in general to a positive backdrop for the Canadian dollar overall," said Watt, but added: "If there was significant M&A flow, I might've expected the Canadian dollar to do somewhat better ... They don't necessarily want to buy near the peak for the Canadian dollar, or the trough for USD/CAD."
The Canadian dollar eased away from the 2-1/2 highs to finish the day at C$0.9869 to the U.S. dollar, or $1.0133, still up from Tuesday's North American finish of C$0.9897 to the U.S. dollar, or $1.0104.
Some analysts believe the currency could soon slide before climbing further, hurt by traders' reluctance to test near-record highs. [ID:nN12235221]
Finance Minister Jim Flaherty said on Wednesday the Canadian dollar reflected the country's healthy fiscal position and warned not to expect a return to the days where it was undervalued. [ID:nN12262031]
BONDS DECLINE ON RISK APPETITE
Canadian bond prices were lower across the curve as North American investors in general lost interest in safe-haven debt. [US/]
The two-year bond CA2YT=RR fell 3 Canadian cent to yield 1.750 percent, while the 10-year bond CA10YT=RR dropped 28 Canadian cents to yield 3.260 percent.
"The bigger risk-on theme is stemming from the fact that there's a successful Portuguese auction, there is some more favorable comments coming out of the euro zone peripherals," said Ian Pollick, a portfolio strategist at TD Securities.
"Risk appetite is returning to the market somewhat and yields are suffering as a consequence."
Even so, Canada's auction of five-year bonds on Wednesday met with decent demand. The sale of C$3.2 billion government bonds, due June 1, 2016, produced an average yield of 2.674 percent, up from 2.182 percent during the previous auction in November. [ID:nN12220193] (Editing by Jeffrey Hodgson)