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Canadian Dollar Appreciates on U.S. Economic Growth Outlook

Canada’s dollar rose against all its 16 major peers on speculation the nation’s exports will benefit from accelerating U.S. economic growth.

The Canadian currency extended an eight-week advance against the euro amid concern Europe’s fiscal turmoil will worsen after Standard & Poor’s cut the credit ratings of nine nations last week, including Italy, France and Spain. The currency, nicknamed the loonie, also advanced as the Bank of Canada prepares to set interest rates tomorrow.

“The Canadian dollar is performing well but so is the Mexican peso and to a slightly lesser extent the Brazilian real,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “North America is moving ahead and looking to short the euro.” A short position is a bet a currency will drop.

Canada’s currency rose 0.5 percent to C$1.0179 per U.S. dollar at 5 p.m. in Toronto from C$1.0232 on Jan. 13. One Canadian dollar bought 98.24 U.S. cents. The U.S. market is closed for the Martin Luther King Day holiday.

The Bank of Canada will hold rates at 1 percent, where they’ve been since September 2010, according to all 26 forecasts compiled by Bloomberg. The central bank said last month that Europe’s fiscal crisis is a key risk to the domestic recovery, and policy makers may reiterate that view in tomorrow’s statement, due at 9 a.m. Ottawa time.

Regional reports from the New York Federal Reserve tomorrow and the Philadelphia Fed on Jan. 19 may show manufacturing continued to improve in January, according to economist surveys.

Euro Weakens

Canada’s dollar touched C$1.2883 versus the euro, the strongest level in a year, on demand for the assets of countries with the highest credit ratings. After European markets closed today, S&P cut the rating of the European Financial Stability Facility, the euro-region bailout fund, to AA+ from AAA.

Canada, Germany, the U.K. and Sweden are the only Group of 10 countries with stable AAA ratings from the three main credit assessment companies. S&P cut France to AA+ from AAA on Jan. 13, the same day it assigned the Netherlands a “negative” outlook. It lowered the U.S. to AA+ in August. Italy is rated A2 by Moody’s Investors Service, which rates Japan and Belgium Aa3. Australia, not in the G-10, also has a stable AAA rating from all three agencies.

“With the Canadian dollar you get the shrinking pool of AAA assets,” said David Watt, senior currency strategist in Toronto at Royal Bank of Canada’s RBC Capital Markets unit, in a telephone interview. Watt recommends selling the euro against the Canadian dollar.

“You still have concerns about Asia and the credit crunch out of Europe and the global trade backdrop,” he said. “If those flare up even a little bit, you start thinking about the outlook for the global economy and you bias yourself towards the North American block.”

Canada’s government bonds fell today, with the benchmark two-year yielding 0.96 percent, up one basis point. The country’s federal bonds have gained 0.01 percent this year, after returning 9.6 percent last year, the most since 2008, according to Bank of America Merrill Lynch data.

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