Jan. 29 (Bloomberg) -- The Canadian dollar rose above par against the U.S. currency for the first time in three weeks on speculation Canada's interest-rate advantage over the U.S. may widen.

Canada's dollar strengthened versus 14 of the 16 most- traded currencies before the Federal Reserve decision tomorrow. Policy makers may cut the U.S. benchmark lending rate by 50 basis points to 3 percent, according to futures prices quoted on the Chicago Board of Trade. That would widen the rate gap to 1 percentage point, with Canada's borrowing costs at 4 percent.

``It's a part of a broad-based U.S. dollar weakness before the rate meeting,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets. ``Currencies linked to commodity exports are generally gaining in this environment.''

The currency, known as the loonie after the image of the bird on its one-dollar coin, rose 0.4 percent to 99.95 Canadian cents per U.S. dollar at 4 p.m. in Toronto, from C$1.0035 yesterday. It touched 99.44 Canadian cents, the strongest since Jan. 4. One Canadian dollar buys $1.0007.

The U.S. dollar declined against 10 of the 16 most-traded currencies. The Canadian dollar gained the most, 0.8 percent, against the Swiss franc today.

The Canadian dollar gained 1.9 percent last week, wiping out losses it suffered earlier this month.

Interest-rate futures traded on the Chicago Board of Trade show 78 percent odds the Fed will lower borrowing costs a half- percentage point tomorrow and a 22 percent chance of a quarter- percentage point cut. The odds were 80 percent and 20 percent, respectively, on Jan. 22.

Rate Gap Created

The Bank of Canada lowered its main interest rate a quarter-percentage point to 4 percent on Jan. 22. In an emergency move the same day, the Fed cut its federal funds target by three-quarters of a percentage point, pushing the rate lower than Canada's for the first time in three years.

Policy makers will cut Canada's benchmark overnight lending rate to 3.25 percent by June, according to median estimate of 17 economists in a Jan. 22 Bloomberg survey. Borrowing costs will fall to 3.75 percent in March and 3.5 percent by April, according to the survey.

The Canadian dollar also strengthened as prices of the nation's commodity exports rose. Gold touched a record and crude oil rose for a fourth straight day. Commodities account for about half of Canada's exports. The U.S. is Canada's largest trading partner.

The loonie has rebounded from a four-month low reached last week amid concern that the U.S.-led economic slowdown will spill over and hurt the Canadian economy. Equities gained globally.

`Aggressive Easing Mode'

``Investors are a little more hopeful for the global economy,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``With the Federal Reserve in an aggressive easing mode and equities better supported, markets are doing a little bargain hunting and buying up some Canadian dollars'' at lower levels. Osborne predicts the currency will stay near parity with its U.S. counterpart in the first quarter.

Canada's dollar will weaken to C$1.06 by the end of 2008, according to the median forecast of 41 economists surveyed by Bloomberg News.

Trading Range

Canadian Finance Minister Jim Flaherty said the government ``supports'' the Bank of Canada's assumed trading range for the Canadian dollar, which he said was between 95 U.S. cents and 98 U.S. cents.

Dustin Reid, a senior currency strategist at ABN Amro Inc. in Chicago, said the Canadian dollar is vulnerable to the U.S. economic situation.

The rebound in equities ``is the most important factor that helped the Canadian dollar in the last three to four sessions,'' said Reid, who forecast the currency will weaken to C$1.05 by March. ``People, on a very short-term basis, are willing to put risk back on the table.''

The currency remained higher after a government survey showed Canadian manufacturers were the least optimistic about their production prospects since January 2002.

The yield on the Canadian government's two-year, 4.25 percent bond due December 2009 rose 6 basis points, or 0.06 percentage point, to 3.27 percent. The price fell 11 cents to C$101.75.

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

Last Updated: January 29, 2008 16:02 EST