* Higher commodity prices support rise in Canadian dollar
* Short-end bond prices up on talk of interest rate cuts
TORONTO, Oct 29 (Reuters) - The Canadian dollar climbed versus the U.S. dollar on Wednesday on rising prices for Canadian commodities such as oil and gold and a rally in equity markets helped the currency move further off the four-year low.
Bond prices were mostly higher as an interest rate cut in China and a likely U.S. rate cut later on Wednesday sparked some demand for more secure government debt.
At 9:25 a.m. (1425 GMT), the Canadian unit was at C$1.2600 to the U.S. dollar, or 79.37 U.S. cents, up from C$1.2827 to the U.S. dollar, or 77.96 U.S. at Tuesday’s close.
Earlier the currency rallied 2.3 percent to C$1.2544 to the U.S. dollar, or 79.73 U.S. cents, from the previous session’s closing level as provided by the Bank of Canada.
Higher prices for major Canadian exports such as oil and gold helped drum up demand for the currency, while improved market sentiment left investors a more comfortable holding on to higher-yielding currencies.
“Some of the traditional drivers for the Canadian dollar are certainly helping out today, most notably the bounce back in gold and oil prices,” said Doug Porter, deputy chief economist at BMO Capital Markets.
“But more generally over the last 24 hours we have seen the markets back away from the extreme risk aversion that had been the hallmark of markets in recent months.”
The rally in the currency marked a big turnaround from Tuesday when it tumbled to C$1.3019 to the U.S. dollar, or 76.81 U.S. cents, its lowest level since September 2004. That move was blamed largely on investors who continued to liquidate riskier assets in favor of the greenback.
The Canadian industrial product price index and the raw materials price index for September are due out on Thursday, followed by Friday’s gross domestic product report for August.
Canadian bond prices reclaimed some of the losses suffered on the short end of the curve as central banks around the globe are scrambling to cut interest rates to cushion the economic fallout of the financial crisis.
China cut interest rates for the third time in six weeks to help the world’s fourth-largest economy ride out the global financial crisis, and there is talk that the Bank of Japan is gearing up to cut rates on Friday.
Also, the Federal Reserve is widely expected to cut U.S. interest rates by at least a half-percentage-point. A decision is due around 2:15 p.m.
“The main story here is that interest rates continue to come down rapidly around the world,” Porter said. “It’s no longer just a North American story anymore, we’re seeing big rate cuts everywhere.”
The Canadian overnight Libor rate LIBOR01 was 2.2550 percent, down from 2.2750 percent on Tuesday.
Tuesday’s CORRA rate CORRA= was 2.2502 percent, down from 2.2512 percent on Monday. The Bank of Canada publishes the previous day’s rate at around 9 a.m. daily.
The two-year bond was up 3 Canadian cents at C$101.37 to yield 2.075 percent. The 10-year was down 2 Canadian cents at C$104.45 to yield 3.693 percent.
The yield spread between the two-year and the 10-year bond moved to 161 basis points from 159 at the previous close.
The 30-year bond fell 15 Canadian cents to C$113.05 to yield 4.210 percent. In the United States, the 30-year Treasury yielded 4.154 percent. (Editing by Peter Galloway)