Oct. 30 (Bloomberg) -- Canada's currency increased for a third day to the strongest in more than a week as global stocks rose and the U.S. economy contracted less than forecast.

The Canadian dollar is poised for its biggest weekly gain since at least 1971, when Bloomberg records begin. The U.S. is Canada's largest trading partner.

``We've seen asset markets rebounding, equity markets moving higher and volatility easing back,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, France's biggest bank. ``The Canadian dollar is likely to gain a fair bit of ground in the coming days.''

The loonie, as the Canadian currency is known because of the aquatic bird on the one-dollar coin, climbed as much as 2.8 percent to C$1.1902 per U.S. dollar, the strongest since Oct. 21, from C$1.2233 yesterday. It traded at C$1.2111 at 2:33 p.m. in Toronto. Canada's dollar rose 5.5 percent since Oct. 24, after four weekly declines. One Canadian dollar buys 82.65 U.S. cents.

The MSCI World Index, a gauge of stocks in 23 developed nations, added 2.7 percent to 949.62, advancing for a third day. The Dow Jones Industrial Average gained 1.8 percent in New York. Canada's primary index, the Standard & Poor's/TSX Composite Index, rose 1.5 percent in Toronto.

Currency Will Strengthen

Stannard predicts the loonie will strengthen to about C$1.17 or C$1.18 heading into next week, though he expects the currency will weaken back to C$1.30 over the course of the year and into the first quarter of 2009.

``A significant shift in market psychology has taken place for the U.S. dollar against the Canadian dollar,'' George Davis, chief technical analyst at RBC Capital Markets, wrote in a note today. Davis assigned C$1.19 as an ``initial downside target.''

U.S. gross domestic product contracted at a 0.3 percent pace from July to September, according to a Commerce Department report today in Washington. The decline was smaller than the 0.5 percent contraction forecast by economists surveyed by Bloomberg News.

The Federal Reserve cut its target lending rate by a half- percentage point yesterday to 1 percent. Canada's central bank lowered its key rate last week by a quarter-percentage point to 2.25 percent. The European Central Bank, the Bank of England and Reserve Bank of Australia are ``likely'' to cut next week, according to CIBC World Markets analysts Shane Enright in Toronto and Adam Fazio in New York.

``A combination of global rate cuts and asset allocation rebalancing have sparked a global equity recovery,'' Enright and Fazio wrote in a note today. That's ``a clear catalyst for the paring of long U.S. dollar positions.'' A long position is a bet that a currency, commodity or stock will gain. They recommend buying U.S. dollars between C$1.1650 and C$1.1850, and predict the loonie may return to C$1.30 by year-end.

`Rebounded Sharply'

``The Canadian dollar had rebounded sharply to more reasonable levels,'' Victoria, British Columbia-based Paul Lennox, treasurer at currency exchange Custom House, wrote in a note to clients. ``It would not be surprising to see the Canadian dollar back in the 85 U.S. cent to 90 U.S. cent range in the coming weeks.''

The 10-year note's yield fell 2 basis points, or 0.02 percentage point, to 3.73 percent. The price of the 4.25 percent security maturing in June 2018 rose 14 cents to C$104.20.

The yield on the two-year government bond fell 4 basis points to 2.03 percent. The price of the 2.75 percent security due in December 2010 gained 7 cents to C$101.47.

The 10-year bond yielded 170 basis points more than the two- year security, the widest spread since August 2004.

``Steep is the theme we'll be seeing for some time,'' said Craig Wright, chief economist at Toronto-based Royal Bank of Canada, the country's largest lender by assets. ``We're looking at overnight rates firmly anchored by very accommodative central banks and risks of even more accommodative central banks going forward.''

Wright forecasts a further steepening as the Bank of Canada cuts borrowing costs at its next meeting on Dec. 9. He predicts the Canadian dollar will trade between C$1.30 and C$1.35 by the end of the first quarter in 2009.

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

Last Updated: October 30, 2008 14:38 EDT