Feb. 8 (Bloomberg) -- Canada's dollar surged against its U.S. counterpart after a larger-than-expected increase in employment fueled speculation the Bank of Canada will be slow to reduce interest rates, resulting in a wider rate advantage over the U.S.

The Canadian currency rose the most in more than two weeks against the U.S. dollar and gained against all 16 most-traded currencies. The government said today the economy added 46,400 jobs last month. The increase, which was more than four times the median forecast in a Bloomberg News survey, pushed the unemployment rate back to a 33-year low of 5.8 percent set in October.

``There is no doubt that the Canadian economy is much more robust than the U.S.,'' said Alan Ruskin, Greenwich, Connecticut- based chief international strategist at RBS Greenwich Capital Markets. ``The market is erring a little on the aggressive side as far as the rate expectations are concerned. The Bank of Canada will proceed with caution, and that should keep the rate spreads more in favor of the Canadian dollar.''

Canada's dollar advanced 0.91 percent, the most since Jan. 24, to 99.96 Canadian cents per U.S. dollar at 4:02 p.m. in Toronto. It was C$1.0087 late yesterday, when the currency declined to a two-week low on concern a U.S.-led slowdown will hurt the global economy. One Canadian dollar buys $1.0002.

The Bank of Canada reduced its 2008 economic growth forecast on Jan. 24 to 1.8 percent from 2.3 percent because of weaker export demand from the U.S. and reiterated it will probably cut interest rates again this year.

Reduced Bets

Canada's key lending rate was lowered Jan. 22 to 4 percent, and the central bank will cut it to 3.25 percent by June, according to the median forecast in a Bloomberg survey. The benchmark U.S. rate is 3 percent, and futures on the Chicago Board of Trade show a 72 percent chance the Federal Reserve will lower it by a half-percentage point at or before its March 18 meeting.

Doug Porter, deputy chief economist at BMO Capital Markets in Toronto, forecast new Bank of Canada Governor Mark Carney will reduce the rate by a quarter point on March 4. Before today's labor report was released, Porter had predicted a half-point cut.

The central bank will lower rates by a quarter point at each of its next four meetings, Porter said by telephone.

Currency Stalled

Canada's currency stalled this year after climbing about 17 percent in 2007 as the U.S. economy, the largest consumer of Canadian exports, shows signs of weakness and subprime mortgage losses reduce credit availability worldwide.

The currency, known as the loonie after the image of the bird on its one-dollar coin, drew investors last year as Canada's economy benefited from rising demand for copper, gold, wheat and oil from the U.S. and emerging economies such as India and China.

Canada also is the world's largest producer of uranium and the second-biggest exporter of natural gas, and it sits on the largest pool of oil reserves outside the Middle East.

``The potential danger in Canada is that the interest-rate cuts have been well discounted in the currency market,'' said Michael Metcalfe, London-based head of macro strategy at State Street Global Markets, a unit of the world's largest money manager for institutions. ``In periods when you get bad and good news, you're going to get people who will question whether short bets on the currency are justified.'' A short position is a bet on the currency's decline.

The yield on Canada's two-year bond was down 1 basis point, or 0.01 percent, from yesterday at 3.06 percent. The price of the 4.25 percent government security due in December 2009 was up 1 cent to C$102.06.

Canadian new-home starts rose more than expected in January, powered by the reduced unemployment rate. Housing starts climbed to 222,700 units on an annual basis, compared with a revised 184,700 units in December, Canada Mortgage and Housing Corp. said today from Ottawa. Economists forecast 210,000 units, the median of 21 responses in a Bloomberg News survey.

To contact the reporter on this story: Haris Anwar in Toronto at hanwar2@bloomberg.net

Last Updated: February 8, 2008 16:12 EST