Sept. 18 (Bloomberg) -- Canada's dollar rose to the highest since 1977, approaching parity with the U.S. dollar, after the Federal Reserve reduced its benchmark interest rate by a half- percentage point to keep the world's largest economy from slipping into a recession.

The Canadian currency appreciated for a seventh day as the nation's interest-rate differential with its main trading partner narrowed to 25 basis points. Commodities such as crude oil and gold, which account for about half of Canada's exports, also rose on the Fed's move.

The U.S. rate reduction ``increased quite significantly'' the likelihood of the Canadian dollar reaching parity, said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada's largest bank by assets. ``This may come in the very near future.''

Canada's dollar rose 1.4 percent to 98.70 U.S. cents at 4:34 p.m. in Toronto. It touched 98.75 U.S. cents, the strongest since January 1977. One U.S. dollar buys C$1.0132.

The Canadian currency has been the best performer against the U.S. dollar so far this year, increasing 15 percent and fueling speculation it will trade at parity for the first time since November 1976. The U.S. dollar fell today against all of the 16 most actively traded currencies tracked by Bloomberg News except the Japanese yen.

``Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,'' the Federal Open Market Committee said in a statement after cutting its benchmark rate to 4.75 percent. The central bank will ``act as needed to foster price stability and sustainable economic growth.''

Canadian Strength

The Fed rate cuts come at a time when the Canadian economy is showing signs of strength. It's set to expand 2.5 percent this year, outperforming the U.S. for the first time in five years, according to a Bloomberg News survey this month. Canada's benchmark rate is 4.5 percent.

Canada's currency, nicknamed the loonie after the image of the national bird on the one-dollar coin, has risen 5.1 percent against its U.S. counterpart since June 12 on speculation losses related to subprime mortgages would prompt the Federal Reserve to cut interest rates.

``The equity market is rallying, and commodities are doing great,'' said Firas Askari, head of foreign-exchange trading in Toronto at BMO Capital Markets. ``The market is in love with the Canadian dollar again. Parity is probably a matter of when, not if.''

The yield on the benchmark two-year Canadian government bond fell 8 basis points, or 0.08 percentage point, to 4.20 percent. The price of the 3.75 percent security maturing in June 2009 rose 13 cents to C$99.27. Bond yields move inversely to prices.

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

Last Updated: September 18, 2007 16:36 EDT