Oct. 15 (Bloomberg) -- Canada’s currency weakened for the first time in six days, pausing in a move toward parity with the U.S. dollar, as traders speculated its gains may be overdone before a Bank of Canada policy meeting on Oct. 20.

“We’re less than a week away from the Canadian central bank making a decision on interest rates, and people are thinking that we’ve maybe gone too far with these recent gains, which is why we’re seeing a short-term pullback,” said David Watt, senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank.

Canada’s dollar earlier today touched the strongest level since July 29, 2008, C$1.0207, capping a rally spurred by a climb in crude oil and a slumping American dollar. Canada, which gets more than half of its export revenue from raw materials, is the biggest supplier of energy products to the U.S. The Canadian currency last traded at C$1 to the greenback in July 2008.

The Canadian dollar depreciated 1 percent to C$1.0338 per U.S. dollar at 5 p.m. in Toronto, from C$1.0236 yesterday. Earlier it dropped 1.3 percent, the most on an intraday basis in two weeks. One Canadian dollar buys 96.73 U.S. cents.

Crude oil for November delivery gained 3.5 percent to $77.78 a barrel on the New York Mercantile Exchange after reaching $77.97, the highest since Oct. 15, 2008. Prices climbed 8 percent this week and 74 percent this year.

Market Mood

“It’s notable that oil has pushed quite a bit on the upside -- this suggests that the market is in less of a mood to push the Canadian dollar too far stronger given the risk from the Bank of Canada,” said Sacha Tihanyi, a currency strategist in Toronto at Scotia Capital Inc., a unit of the nation’s third- biggest bank.

Canada’s currency, nicknamed the loonie for the aquatic bird on the one-dollar coin, was the top performer against the U.S. dollar among all 16 of the most-traded currencies tracked by Bloomberg over the past five days except Brazil’s real. The greenback fell against 13 of them as investors sought higher- yielding assets.

The Bank of Canada meets next week to determine interest rates. All 16 economists in a Bloomberg survey expect policy makers to keep the target lending rate at a record low 0.25 percent. The meeting will come two weeks after Australia became the first country in the Group of 20 nations to raise interest rates since the credit crisis started.

‘Long Way Away’

“There’s been a reassessment that the Bank of Canada will follow in footsteps of the Reserve Bank of Australia,” said Doug Porter, deputy chief economist at BMO Capital Markets in Toronto. “That was one of the factors that got the Canadian dollar going -- a lot of chatter that the Bank of Canada might be next. But we’re still a long way away from the Bank of Canada raising interest rates.”

Canada’s central bank lowered its benchmark lending rate to 0.25 percent in April and pledged to keep it there through June 2010 unless the inflation outlook changes materially. The rate was 4.5 percent when the bank began cutting it in December 2007.

Bank officials have said since June a stronger Canadian dollar is a risk to the nation’s economic recovery.

The currency has a 62 percent probability of trading on a one-to-one basis with the greenback by year-end, according to implied volatility from options trading monitored by Bloomberg, up from 61 percent on Oct. 13. The one-month probability is 40 percent, options trading shows.

Canada’s dollar may strengthen to a record high against its U.S. counterpart as demand for the country’s commodities increases, David Rosenberg, chief economist and strategist at Toronto-based wealth manager Gluskin Sheff + Associates Inc., said today in an interview.

‘New High’

“Are we going to go to a new high?” Rosenberg, former North American chief economist at Merrill Lynch & Co., said in an interview today in Toronto. “The answer to that question is yes. The question is when, but I don’t think anybody’s got the answer to that.”

The loonie reached parity for the first time in three decades in September 2007 after riding a five-year boom in commodity prices. It fell a record 18 percent last year as commodities plunged. The currency strengthened 26 percent since touching a four-year low on March 9.

“Further gains toward parity are going to be hard-fought, with real money players and longer-term dealers taking some of the profits off the table,” said John Curran, a Toronto-based senior vice president at CanadianForex Ltd., an online foreign- exchange dealer.

Canada auctioned C$1.5 billion ($1.46 billion) of 30-year bonds today at an average yield of 4.016 percent. The government received bids of C$3.53 billion for the 4 percent notes maturing in June 2041, according to a statement on the Bank of Canada’s Web site.

Longer-term government bonds fell, pushing the yield on the 20-year bond up three basis points, or 0.03 percentage point, to 4.11 percent. The 8 percent security due in June 2027 dropped 44 cents to C$148.40. The yield on the 10-year note rose two basis points to 3.55 percent.

To contact the reporters on this story: Ruby Madren-Britton in New York at rmadrenbritt@bloomberg.net; Chris Fournier in Montreal at cfournier3@bloomberg.net

Last Updated: October 15, 2009 17:01 EDT