Sept. 21 (Bloomberg) -- Canada's dollar rose, capping the biggest weekly gain since 1988, amid optimism that surging demand for commodities will fuel economic growth.

The currency rose above $1 yesterday for the first time since November 1976 as crude oil set a record high. Commodities such as crude and gold, which rose to the highest in 27 years today, account for about half of Canada's exports.

``The odds favor the Canadian dollar staying firm,'' said Shaun Osborne, chief currency strategist at TD Securities in Toronto. ``The U.S. dollar is looking generally soft and oil prices are liable to remain strong for a while.''

Canada's dollar rose to 99.92 U.S. cents at 5 p.m. in Toronto, from 99.76 U.S. cents yesterday, after earlier climbing to $1.0064. The U.S. dollar buys C$1.0008. Canada's currency gained 2.9 percent this week, its biggest weekly rally since November 1988. The currency is up 17 percent this year, the most against the U.S. dollar among the 16 most actively traded currencies.

Canada has benefited from rising demand for copper, gold, wheat and oil from the U.S. and from emerging economies such as India and China. The country is the world's largest producer of uranium, the second-biggest exporter of natural gas, and sits on the largest pool of oil reserves outside the Middle East.

Record Bets

Futures show hedge funds and large speculators held a record net 79,828 contracts on a rise in the currency as of Sept. 18 on the Chicago Mercantile Exchange, up 36 percent from the prior week, according to the Washington-based Commodity Futures Trading Commission.

The currency briefly pared its gains after Statistics Canada said the nation's retail sales declined 0.8 percent in July after falling 1.1 percent in the previous month. The median forecast in a Bloomberg News survey was for sales to be flat.

``There is a lot of momentum behind the move and the trend is strong,'' said Camilla Sutton, a currency strategist at Scotia Capital Inc. in Toronto. It is too early to call a peak in the Canadian dollar, ``especially with commodities strong and the U.S. broadly weaker.''

Traders sold U.S. dollars today on speculation the Federal Reserve will continue to reduce interest rates to prevent the world's largest economy from slipping into a recession after house prices slumped. The U.S. dollar fell today against 12 of 16 major currencies tracked by Bloomberg. A lower Fed target can decrease the appeal of deposits in the currency.

Canada's central bank raised rates in July and may increase them again this year to stem inflation, futures contracts show. Canada's key rate is 4.5 percent.

The yield on the benchmark two-year Canadian government bond fell 12 basis points, or 0.12 percentage point, to 4.20 percent. The price of the 3.75 percent security maturing in June 2009 rose 19 cents to C$99.28. Bond yields move inversely to prices.

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

Last Updated: September 21, 2007 17:06 EDT