A man holds the new Canadian 100 dollar bill made of polymer in Toronto.
The Canadian dollar gained sharply against the U.S. dollar on Wednesday as investors cheered a political deal reached in the U.S. Congress that staved off measures that would likely have pushed Canada's main trading partner into recession.
The Canadian currency notched its biggest one-day gain since October 17 after U.S. lawmakers on Tuesday approved a plan to prevent huge tax increases and delay spending cuts that were due to kick in this month.
The deal also was followed by price jumps in gold, oil and stocks. But attention quickly turned to issues left unresolved by the fiscal deal, such as the need to increase the U.S. debt limit.
"They got past one hurdle but they're basically just halfway there," said Greg Moore, foreign exchange strategist at TD Securities. "While it does relieve a bit of short-term uncertainty ... there is still certainly potential for risk aversion to creep back in the coming months."
The Canadian dollar closed at C$0.9852 to the greenback, or $1.0150. It had ended 2012 near C$0.9925, or $1.0076, at 4 p.m. Eastern (2100 GMT) on Monday, according to Thomson Reuters data.
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The currency reached C$0.9836, its strongest level against the greenback since December 18. It hit an almost nine-month high against the slumping Japanese yen, touching 88.62 yen at one point.
While a deal was widely expected by investors, most placed significant weight on a risk that no deal would be done in time.
"It wasn't perceived as a done deal that the issue would be resolved, although that was everyone's median case," said Adam Cole, global head of foreign exchange strategy at Royal Bank of Canada.
"It's the removal of that 20 to 30 percent probability (of no deal) the market was priced for that's resulted in the price move," he said.
Beyond the immediate boost to assets considered more risky, such as the Canadian dollar, Cole said the deal would also shine a more positive light on upcoming economic data, including employment numbers due out on Friday.
"Markets will be prepared to take soft numbers and look through them to the extent that they will be seen as having been distorted by the imminence of the fiscal cliff," he said.
Decent but not dazzling U.S. manufacturing data barely moved the currency on Wednesday, while the euro was hurt versus the Canadian dollar after data showed euro zone factories sank deeper into recession in December.
TD's Moore said the Canadian currency could weaken to C$1.03 versus the greenback in the first quarter due to the ongoing U.S. political uncertainty and signs of weakness in the domestic economy, but expects a slow comeback through the rest of year to end 2013 around C$0.98.
Canadian government debt yields were higher across the curve, with the two-year bond off 5 Canadian cents to yield 1.167 percent, while the benchmark 10-year bond fell 60 Canadian cents to yield 1.870 percent.
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