* C$ at C$1.0003 vs US$, or US$0.9997
* Breaks through parity, touches one-month high
* Europe optimism spurs risk appetite
* Bond prices lower
By Andrea Hopkins
TORONTO, Oct 25 (Reuters) - The Canadian dollar strengthened through parity against its U.S. counterpart on Tuesday as optimism over Wednesday's euro zone debt crisis summit spurred risk appetite, sending equities and oil higher.
It was the first time since Sept. 21 that the Canadian currency was stronger than the safe-haven greenback and suggested investors were betting on a solution to the European crisis that would help restore global economic growth -- despite huge obstacles still facing the euro zone.
"Markets have very high expectations for this EU summit tomorrow and optimism is showing in the markets this morning," said Blake Jespersen, director, foreign exchange sales at BMO Capital Markets.
"A little bit of caution is needed here. I think the market has maybe gotten a bit ahead of itself and there still remains a fairly high probability that the EU summit could disappoint the markets and that could send us the other way. This is building for a potential short squeeze in dollar-Canada."
At 8:11 a.m. (1211 GMT), the Canadian dollar CAD=D3 stood at C$1.0003 to the U.S. dollar, or $0.9997, just below parity and above Monday's North American session close at C$1.0031 to the U.S. dollar, or 99.69 U.S. cents.
The currency fell below parity with the U.S. dollar on Sept. 21 as global growth fears dominated markets and investors fled to the safety and liquidity of the U.S. dollar.
Jespersen said he expects trade in dollar-Canada to remain in a fairly tight range near parity, between C$0.9950 and C$1.0030, ahead of the outcome of Wednesday's summit in Europe, before succumbing to whatever market sentiment takes hold after the summit conclusion.
"Tomorrow is anyone's guess. I think there is a chance for some out-sized moves in currency markets and tomorrow we could see anywhere from a 2 to 3 cent move depending on what comes out of this summit. The risk is skewed to a stronger U.S. dollar, and that would be a view that EU does disappoint and that could send dollar-Canada all the way back to maybe C$1.02 or C$1.0250," he said.
EU leaders are to meet on Wednesday with tentative plans in place for Greece's debt to be reduced, European banks to be recapitalised and the euro zone's EFSF rescue fund to be increased to provide partial insurance for sovereign bonds.
But the agreements and how far they go remain under discussion, causing some nerves on financial markets.
World stocks, including European shares, were higher and the euro gained, hitting a new six-week high. U.S. oil rose for a third straight day to hit a 3-month high above $93 a barrel. Wall Street looked set to open higher, boosting sentiment in Europe. [MKTS/GLOB]
Canadian markets will also keep one eye on the Bank of Canada's rate announcement, due at 9 a.m. (1300 GMT), though no change in official policy is expected.
All 40 economists and strategists polled by Reuters see the Bank of Canada maintaining its overnight target rate at 1 percent. The median forecast is for the next rate hike to not be before the third quarter of next year.
"(The Bank of Canada is) still going to remain very cautious given that the U.S. economy has not been able to find its footing and all the problems in Europe," said Jespersen.
"So I don't think the Bank is going to be much of an event today especially with what's coming up tomorrow."
Canadian government bond prices were mixed. The two-year bond CA2YT=RR was down 2.5 Canadian cents to yield 1.115 percent, while the 10-year bond CA10YT=RR fell 8 Canadian cents to yield 2.376 percent.
(Editing by Chizu Nomiyama)