By Frank Pingue
TORONTO, Feb 28 (Reuters) - The red-hot Canadian dollar extended its run higher against the U.S. dollar on Thursday, revisiting levels not seen since mid-November, as a backdrop of lofty commodity prices offered support.
Domestic bond prices ended higher across the curve as the latest economic data from the United States raised fears about a recession and supported the case for lower interest rates.
The Canadian dollar closed at US$1.0241, valuing a U.S. dollar at 97.65 Canadian cents, up from US$1.0196, valuing a U.S. dollar at 98.07 Canadian cents, at Wednesday's close.
After skidding for three straight weeks, the Canadian currency has turned around and surged 3.7 percent versus its U.S. counterpart this week.
It hit US$1.0298, valuing a U.S. dollar at 97.11 Canadian cents, in the first half of the North American session, which marked its highest level since Nov. 19.
The bulk of its gains have been pegged to high commodity prices, namely a surge in oil prices to a record above $102 a barrel. Canada is a major producer and exporter of oil, as well as commodities such as gold.
Also helping compound the dollar's gains has been a weaker greenback given a run of weak data and widespread expectations for the U.S. Federal Reserve to lower interest rates.
"There seems to be real underlying strength in commodity prices and I do believe this is more than just the flip side of a weak U.S. dollar," said Doug Porter, deputy chief economist at BMO Capital Markets.
"The Canadian dollar has had an enormous run and it feels like what we saw back in late October and early November."
Last November the Canadian dollar shot to a modern-day high of US$1.1039, valuing a U.S. dollar at 90.59 Canadian cents, due to a slew of factors that included lofty commodity prices, a weak U.S. dollar, upbeat domestic data and few expectations for Bank of Canada rate cuts.
Likely keeping the Canadian dollar from making a serious run at its modern-day high is the lack of any merger-related interest like the C$40 billion deal for Alcan Inc. that was working its way through the system late last year.
Another factor holding the Canadian dollar from taking off is that the Bank of Canada is widely expected to cut its key overnight rate on March 4.
Canadian bond prices followed the bigger U.S. Treasury market to a higher close, which has been the case for much of the week given the lack of domestic data and scores of weak data from the United States.
Weak fourth-quarter figures on U.S. gross domestic product and another report showing U.S. unemployment-benefit claims jumped last week helped support a rally in the bond market.
"Most of that strength is being driven by another round of very sour U.S. data," said Porter. "But definitely the strength in the Canadian dollar probably isn't hurting the cause."
The faster the Canadian dollar rises the greater the likelihood of more aggressive easing by the Bank of Canada.
Canada's economic calendar, which has been relatively quiet all week, picks up on Friday with the industrial product price and raw materials price indexes for January.
The two-year bond rose 18 Canadian cents to C$102.20 to yield 2.944 percent. The 10-year bond gained 82 Canadian cents to C$102.22 to yield 3.714 percent.
The yield spread between the two- and 10-year bond was 77.0 basis points, up from 76.7 basis points at the previous close.
The 30-year bond added C$1.51 to C$115.26 to yield 4.099 percent. In the United States, the 30-year treasury yielded 4.527 percent.
The three-month when-issued T-bill yielded 3.18 percent, down from 3.21 percent at the previous close.