The Canadian dollar hit a six-week high Tuesday as rising commodity prices and a renewed appetite for riskier assets sent global investors flocking to the currency.
The loonie CAD/USD-I rose more than a cent to 95.85 cents (U.S.) from Monday's close of 94.73 cents.
"The trend is for a stronger Canadian dollar," said Firas Askari, head of currency trading at BMO Nesbitt Burns, who thinks the loonie could break parity before this month's holidays. "The U.S. dollar is basically selling across the board. You've got equities up, commodities up. The risk trade is back on."
Broad-based U.S. dollar selling will continue, contributing to the Canadian currency's gains, strategists said.
"The U.S. dollar has been on a long-term depreciating trend since 2001. That's going to continue because the U.S. economy has a lot of challenges, to say the least," said Krishen Rangasamy, economist at CIBC World Markets in Toronto, citing the country's ballooning debt loads and trade imbalance.
Higher oil, gold and base metal prices are fuelling Tuesday's optimism, and so is an earlier report showing Chinese manufacturers grew at the fastest rate in five years. The Reserve Bank of Australia, meantime, raised interest rates for the third straight month amid signs of a stronger economy.
Currency markets remain volatile. The Canadian dollar tumbled late last week after Dubai's key holding company said it needs a breather on making its debt payments, sparking fears that its financial woes could spread to other countries.
Those concerns eased Tuesday as Dubai said it's in talks to restructure its debt.
The market is "very flip floppy," said Camilla Sutton, currency strategist at Scotia Capital Inc. "Dubai is a real issue and another version of it could come back. There could still be more skeletons in closets. But the biggest piece of the financial crisis is past."
The Canadian dollar has risen about 17 per cent this year, making imports more affordable but posing challenges for the country's exporters, whose goods have become more expensive when sold abroad.
The loonie's gain comes ahead of Friday's monthly jobless report. Economists polled by Bloomberg expect Canadian employers added 15,000 positions in November. Figures yesterday showed the economy expanded at an annual rate of 0.4 per cent in the third quarter, its first increase in a year.
Finance Minister Jim Flaherty said Tuesday he expects a stronger economic showing in the fourth quarter, and that policy makers won't likely intervene in markets to lower the value of the Canadian dollar.
"There are options that we have, if we chose to use them but there is no indication that we would do anything like that now," he told reporters.
"The pressure is downward on the U.S. dollar and that has an effect on all the market currencies, like the Canadian dollar."
Ms. Sutton believes the currency will break through parity, and remain at that level, by the second quarter of next year. Strategists at CIBC World Markets figure parity will happen at the end of next year. At the same time, CIBC figures the Australian dollar will outperform the loonie next year because of Australia's proximity to Asia and lingering fears about Canada's vulnerability to the shaky U.S. economy.
With a file from Reuters
Understanding the Canadian dollar: A four-part series