Oct. 15 (Bloomberg) -- Options traders are boosting bets that Canada’s dollar will trade on a one-to-one basis with its U.S. counterpart for the first time in more than a year on a quicker economic recovery and surging prices of commodities.

The Canadian currency, which was last at C$1 per U.S. dollar in July 2008, has a 65 percent probability of reaching parity with the greenback by Dec. 31, up from 61 percent on Oct. 13, according to implied volatility from options trading monitored by Bloomberg. The chance of it hitting par in one month are 44 percent, trading shows.

“There’s now an increased focus on parity,” said Camilla Sutton, director of currency strategy at Scotia Capital Inc. in Toronto, a unit of the nation’s third-biggest bank. “We can get there very quickly.”

Canada’s dollar, nicknamed the loonie for the aquatic bird on the one-dollar coin, declined for the first time in six days, dropping 0.9 percent to C$1.0324 per U.S. dollar, after reaching C$1.0207, the strongest level since July 29, 2008. It has strengthened 26 percent since reaching a four-year low on March 9. One Canadian dollar buys 96.84 U.S. cents.

The Canadian currency outperformed 10 of the 16 most-traded currencies this year tracked by Bloomberg against the U.S. dollar. The greenback fell against all of them as investors sought higher-yielding assets.

Five-Year Boom

The loonie reached parity in September 2007 for the first time in three decades after riding a five-year boom in commodity prices and strengthening 62 percent from its weakest level, C$1.6193 in January 2002. It hit its strongest at 90.58 Canadian cents to the U.S. dollar two months later and last traded at par on July 22, 2008, 11 days after crude oil reached a record $147.27 a barrel.

The Canadian dollar will “relatively easily” surpass its highs from 2007 in the next year and a half, Dennis Gartman, an economist and the editor of the Gartman Letter, told Bloomberg News yesterday after a speech in Toronto. Gartman predicted in February the currency would reach parity in as little as six months. He also correctly called as early as 2002 the Canadian dollar’s most recent run to par.

“The Canadian dollar will trend well past par to the U.S. dollar,” Gartman said yesterday. “It has to. It has no choice. It’s because of the weakness of the U.S. dollar, but also because of the inherent strength of the Canadian economy.”

Canada, which sits on the largest pool of oil reserves outside the Middle East, generates more than half of its export revenue from commodities. It’s the biggest supplier of crude to the U.S.

Potash, Uranium

Canada is the world’s third-largest exporter of natural gas after Russia and the U.S., according to the Energy Information Administration. It is the globe’s largest producer of uranium and potash and the second-largest exporter of wheat after the U.S. China, the biggest consumer of industrial metals, boosted imports from Canada by 5.8 percent in September, the first increase in at least seven months.

The collapse of Lehman Brothers Holdings Inc. in September 2008 triggered the worst financial crisis in two generations, sending investors scrambling for the safety of the U.S. dollar and crushing demand for raw materials.

The loonie fell 12 percent the following month, the most in at least 58 years, and ended 2008 down 18 percent, a record. It gained 19 percent this year as prospects for economic recovery increased.

‘Natural Consequence’

“The strengthening of the Canadian dollar is a natural consequence of commodities strengthening,” William Downe, chief executive officer of the Bank of Montreal, Canada’s fourth- largest lender, told reporters in Paris on Oct. 13. “With the global weakness of the U.S. dollar, currencies like the Canadian dollar stand out.”

Oil bottomed at $32.40 a barrel in December. Crude for November delivery rose as much as 1 percent today to $75.96 a barrel on the New York Mercantile Exchange, the highest since Oct. 20, 2008. Canada shipped C$17.5 billion ($17 billion) of crude through June this year, 9.8 percent of total exports, according to Statistics Canada data.

The loonie averaged about C$1.31 per U.S. dollar over the past 20 years, according to Bloomberg data. As it has strengthened over the past seven months, Bank of Canada and government officials have tried to talk it down. A stronger currency hampers exporters by making their goods more expensive abroad, and it erodes profit margins by making overseas revenue worth less when converted back to the local currency.

Talk It Down

A persistently strong Canadian dollar would “work against” positive factors such as improved trade, central bank Governor Mark Carney said in the text of a speech he gave Sept. 28 in Victoria, British Columbia. Policy makers said in a June 4 statement a stronger currency may “fully offset” improving economic conditions.

Canadian Prime Minister Stephen Harper said on Oct. 13 he agrees with the Bank of Canada’s assessment that a “too rapid” rise in the country’s currency is a risk.

Harper said that while some of the gains in the Canadian dollar reflect a recovering economy, “obviously, the value of the Canadian dollar is a risk to recovery.”

The central bank next meets on Oct. 20 to determine interest rates. It left borrowing costs at a record low 0.25 percent at its last meeting in September, and reiterated a pledge to keep them there through June 2010, depending on the outlook for inflation. The rate was 4.5 percent when the bank began cutting it in December 2007.

Index Swaps

Traders boosted bets this week that the Bank of Canada will raise interest rates sooner than that.

Moves in overnight index swaps suggest the chances of an increase within five months rose to 17 percent yesterday, from 4 percent on Oct. 5, the day before the Reserve Bank of Australia unexpectedly raised interest rates, the first increase in borrowing costs among the Group of 20 nations since the start of the financial crisis. Odds of an increase in eight months rose to 55 percent yesterday, from 19 percent on Oct. 5.

The spread between overnight index swaps and the central bank rate widened yesterday to 0.195, the most since June 2008, Bloomberg data showed, indicating traders are the most bullish on interest-rate increases since the credit crisis began.

All 16 economists surveyed by Bloomberg News predicted rates will remain at 0.25 percent at the next meeting.

The Canadian dollar was fixed to the U.S. currency from the founding of the Bank of Canada in 1939 until after World War II, according to the central bank’s Web site. It was allowed to float from 1950 until 1962, and then again from June 1970.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

Last Updated: October 15, 2009 09:00 EDT