Sept. 23 (Bloomberg) -- Canada's dollar may extend a rally that has pushed the currency to a 13-year high as hurricanes disrupt oil and gas supplies and drive energy prices higher, said CIBC World Markets and Lehman Brothers Holdings Inc.

Investors and traders have flocked to Canada's dollar amid a surge in oil and commodities prices, which account for 35 percent of the country's exports, as Hurricane Katrina slammed into the U.S. Gulf Coast on Aug. 29.

``It's oil and natural gas prices that move the hearts and minds of those following the Canadian dollar these days,'' said Avery Shenfeld, senior economist at Toronto-based CIBC World Markets, a unit of Canada's fourth-largest bank.

Canada's dollar was little changed at 85.42 U.S. cents as of 2:26 p.m. in New York, after reaching 86 cents yesterday, the highest since January 1992. One U.S. dollar buys C$1.1705.

The currency has gained 2.7 percent against its U.S. counterpart this year, 15 percent versus the euro and 12 percent against the yen. Shenfeld forecasts the currency will strengthen to 88.5 U.S. cents, or C$1.13, before year-end. About a month ago, when the currency was trading C$1.2183, he correctly predicted it would gain to C$1.18.

Energy and commodities make up 10 percent of Canada's economy, the world's eighth largest. The country is the largest exporter of oil to the U.S., according to the U.S. Department of Energy. The nation accounts for 16 percent of U.S. oil imports, followed by Saudi Arabia with 14.8 percent.

`On a Charge'

Crude oil prices hit an all-time high of $70.85 a barrel on Aug. 30 after Katrina struck. Natural gas this week climbed to a record. Hurricane Rita, which has about the same strength as Katrina when it came ashore last month, may hit the coast of Texas and Louisiana early tomorrow, according to the National Hurricane Center.

``The Canadian dollar has been on a charge of late and for good reason,'' said James McCormick, head of global currency research in London at Lehman Brothers Holdings Inc. ``Energy prices have again found strong buying support, aided by Hurricane Katrina and, it seems, the approach of Hurricane Rita.''

McCormick made his comments in the firm's weekly currency strategy report, published yesterday.

Rising energy prices boost Canada's trade surplus, increase direct investment in companies and encourage foreign investment in shares of energy companies in the nation, said Doug Porter, deputy chief economist at BMO Nesbitt Burns in Toronto.

Central Bank Model

In a model developed for the Bank of Canada in 1991, gains in energy prices were shown to weaken Canada's currency. The central bank is revising the model to better explain the link after the Canadian dollar's 33 percent surge against its U.S. counterpart in the past three years.

``Energy is now a positive, it appears, for the Canadian dollar,'' John Murray, an adviser to the central bank, told a conference of economists in Toronto on Sept. 13.

Oil and the Canadian dollar have moved in the same direction about 84 percent of the time in the past six months, according to Bloomberg data. The currency has historically gained about 5 cents against the U.S. dollar for every $10 rise in the price of crude.

``A large part of the trade surplus is oil,'' so rising oil prices will boost the Canadian dollar, said Michael Rosenberg, a foreign-exchange applications specialist at Bloomberg LP, the parent of Bloomberg News.

Rosenberg, who formerly was head of currency research at Deutsche Bank AG in New York, said the Canadian dollar has the potential to rise to C$1.14, or 87.72 U.S. cents, by year-end.

Good News In

Gains may be limited because sentiment has shifted so far in favor of the Canadian dollar, said Greg Gibbs, a currency strategist in Sydney at RBC Capital Markets Ltd., a unit of Canada's largest bank.

``A lot of the good news is already priced into the Canadian dollar,'' Gibbs said. ``It's possible before the year is out that the hurricane season will be over, the Federal Reserve will still be hiking rates, and oil prices will come off, helping take some of the juice out of the Canadian dollar.''

The Canadian dollar's 14-day relative strength index versus the U.S. currency, a measure of momentum over a given period, was 63.20 today. The index rose to a two-month high of 67.93 on Sept. 19. A reading above 70 may signal a reversal of direction.

Canada's dollar will struggle to break C$1.15 and may weaken toward C$1.20 in the next few weeks, Gibbs said.

It may take a year for the currency to reach 88.5 U.S. cents, according to Todd Elmer, a currency strategist in New York at Citigroup Inc. In the meantime, it may reach 86.96 cents, or C$1.15, during the next three months.

The forecast is ``driven by the commodity price story but also by relatively aggressive rate expectations for the Bank of Canada,'' Elmer said.

The central bank on Sept. 7 raised its benchmark interest rate for the first time since October, by a quarter point to 2.75 percent. Citigroup forecasts the bank will increase the rate to 3.25 percent by year-end.

To contact the reporter on this story: Dawn Desjardins in Toronto at at ddesjardins1@bloomberg.net.

Last Updated: September 23, 2005 14:34 EDT