By Allison Bennett and Chris Fournier March 22 (Bloomberg) -- Canada’s dollar fell for a third day amid bets the rally that pushed the currency closest to parity with the greenback in almost 20 months was too fast to be sustained. The loonie, as Canada’s currency is known, pared losses as crude oil and stocks rose. European Central Bank President Jean- Claude Trichet said it’s legally impossible for Greece to leave the euro zone, alleviating concern about a possible breakup and damping demand for the safest assets. “The Canadian dollar had outperformed everything,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal. “These corrections are healthy and much needed after the one-way run we saw.” The Canadian currency weakened 0.2 percent to C$1.0188 per U.S. dollar at 4:18 p.m. in Toronto, from C$1.0173 on March 19. One Canadian dollar buys 98.16 U.S. cents. The loonie rose in 12 of the last 16 sessions to reach C$1.0062 on March 19, the closest to parity with the U.S. dollar since July 23, 2008. Crude oil for April delivery gained 0.7 to $81.25 on the New York Mercantile Exchange after earlier falling as much 2.6 percent. The commodity is the nation’s largest export. The Standard & Poor’s 500 Index gained 0.5 percent. The loonie tends to track movements in crude oil and equities. ‘Acute‘ Challenges The U.S. currency gained earlier after German Chancellor Angela Merkel told investors they shouldn’t expect a European Union summit to agree on assistance for Greece, spurring demand for the perceived safety of the U.S. dollar. EU leaders must not create “illusions” for markets by building expectations for Greek aid, Merkel said an interview with Deutschlandfunk radio that aired yesterday. Her remarks came after Greek Prime Minister George Papandreou and European Commission President Jose Barroso said the EU should spell out its rescue plan at the March 25-26 summit in Brussels. Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures won’t come close to bringing deficits back to prudent levels, John Lipsky, first deputy managing director of the International Monetary Fund, said in a speech yesterday at the China Development Forum in Beijing. Unwinding existing stimulus measures won’t come close to bringing deficits back to prudent levels, Lipsky said. All Group of Seven countries but Canada and Germany will have debt-to-GDP ratios near or exceeding 100 percent by 2014, he said. ‘Sweet Spot’ Canadian Finance Minister Jim Flaherty on March 4 announced a five-year spending plan with cuts to defense, international aid and government operations in a bid to be the first G-7 country to erase its deficit after the global financial crisis. He predicted a shortfall narrowing to C$49.2 billion ($48.1 billion) in the 2010-11 fiscal year, down from a record C$53.8 billion last year. “The Canadian dollar is in a global sweet spot that wins on both defense and offense,” said Derek Holt, an economist in Toronto at Bank of Nova Scotia. “Defensive plays that are worried about sovereign, political, default and global inflation risks want to continue overweighting Canada in global portfolios. But if one thinks there are upsides to global growth and commodities, then an offensive overweight also has justification.” The Canadian currency rose 2.4 percent this month for the second-best performance among its 16 most-traded counterparts versus the greenback. South Africa’s rand, which also relies on commodities for export revenue, performed best. Bank of Canada A government report on March 19 showed Canada’s annual cost of living rose 2.1 in February, more than forecast, fueling expectations the country’s central bank will raise interest rates before the U.S. Federal Reserve. The Bank of Canada kept its target rate at 0.25 percent at its last meeting on March 2. “The market looks very long Canadian dollar at the moment and the positioning is a concern here,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank. “Price action Friday was actually very USD-bullish in the short term so we are looking for a correction towards C$1.03 maybe C$1.04.” A long is a bet the price of an asset will rise. Speculative net long positions -- bets that the Canadian currency will rise versus bets that it will fall -- increased to 69,640 contracts on March 16, compared with net longs of 61,399 a week earlier, according to data from the Commodity Futures Trading Commission in Washington. Productivity Gains Canadian Industry Minister Tony Clement last week said he’s confident productivity gains will offset a strengthening loonie, which is making the country’s exports more expensive. Bank of Canada policy makers reiterated after a meeting on March 2 that the loonie’s “persistent strength” hampers the nation’s economic recovery. To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.netChris Fournier in Montreal at cfournier3@bloomberg.net

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