Sept. 25 (Bloomberg) -- Canada's dollar touched the highest in more than seven weeks as U.S. lawmakers agreed on a ``set of principles'' for a $700 billion financial-rescue plan to inject fresh capital into the paralyzed credit markets.

The Canadian dollar has strengthened 2.8 percent against its U.S. counterpart so far in September and 1.2 percent this week. The U.S. is Canada's largest trading partner.

``Expectations of the passage of the plan should help stabilize the macroeconomic environment for the U.S., and therefore will positively affect the Canadian economy,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. ``The investment and trade links between the U.S. and Canada is why this passage is particularly important for Canada, and why it's helping the Canadian dollar.''

The Canadian currency appreciated 0.4 percent to C$1.0344 per U.S. dollar at 2:46 p.m. in Toronto, from C$1.0386 yesterday. It reached C$1.0299, the strongest since Aug. 4. One Canadian dollar buys 96.67 U.S. cents.

Canada's dollar gained as oil rose 2.1 percent to $107.93 per barrel. The Bank of Canada Commodity Price Index increased this week for the first time in September, gaining 4 percent.

``Oil is adding a slight bid to the Canadian dollar,'' said Jack Spitz, a managing director of foreign exchange at National Bank of Canada in Toronto. ``But the Canadian dollar is continuing to trade in the congested C$1.03 to C$1.04 range, so we'll have to wait for the bill to pass before it's reflected in any broader-based movements in currency land.''

Currency Forecast

The Canadian currency will slip to C$1.12 against the U.S. dollar by the end of 2009, according to the median forecast of 33 economists surveyed by Bloomberg News.

Bank of Canada Governor Mark Carney said while domestic banks are faring well amid the crisis in U.S. financial markets, demand for Canada's products may drop more than anticipated and inflation may slow.

``Any slowdown in the U.S. economy would have consequences for Canada, but the current situation poses particular problems,'' because it affects ``areas that matter most for Canada,'' Carney, 43, said in the text of a speech at the Canadian Club of Montreal. Policy makers had already identified tighter credit ``as the main risk to a modest U.S. recovery next year'' and recent events made that possibility ``more probable,'' he said.

`No Choice'

Spitz said ``Carney's really touting the bailout plan, because there really is no choice for U.S. lawmakers at this point.''

The yield on the two-year government bond climbed 2 basis points, or 0.02 percentage point, to 2.87 percent. The price of the 2.75 percent security due in December 2010 fell 6 cents to C$99.75.

``Hope that the government package in the U.S. is going to be stitched together is pushing up short-term yields generally, and Canada had lagged the move a little bit,'' said Mark Chandler, a fixed-income strategist at RBC Capital Markets in Toronto.

The 10-year government note's yield increased 1 basis point to 3.68 percent. The price of the 4.25 percent note maturing in June 2018 fell 11 cents to C$104.66.

The 10-year bond yielded 81 basis points more than the two- year security, down from 92 basis points on Sept. 18.

The two-year bond's yield will rise to 2.95 percent by the end of this year, while the 10-year bond's yield will increase to 3.76 percent, according to the median forecasts of economists surveyed by Bloomberg News.

The yield advantage of the 10-year U.S. Treasury note compared with similar-maturity Canadian government bonds was 17 basis points, up from 3 basis points on Sept. 18. The Canadian 10-year bond yielded 36 basis points more than its U.S. counterpart on Jan. 22.

Canadian government bonds have returned 4.4 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries have returned 4.7 percent this year.

To contact the reporter on this story: Michael J. Moore in New York at Mmoore55@bloomberg.net.

Last Updated: September 25, 2008 14:48 EDT