Canada’s dollar rose to a two-month high against its American counterpart on concern Europe’s debt crisis is worsening and on signs growth in the U.S. is slowing, supporting demand for Canadian assets. The loonie, as the currency is nicknamed, rose against most of its major counterparts this week after Moody’s Investors Service and Standard & Poor’s put the U.S. under review for a credit downgrade. The currency also appreciated against the euro, which fell after eight banks failed European Union stress tests and Moody’s downgraded Ireland to below investment grade. The Bank of Canada likely won’t raise interest rates next week. “In the environment of concern about financial-sector strength, the Canadian dollar is a fairly attractive currency relative to its peers,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital unit in Toronto. The Canadian currency rose 1 percent to 95.32 cents per U.S. dollar in Toronto, compared with 96.27 cents July 8. Yesterday it touched 95.20, the strongest since May 11. One Canadian dollar buys $1.0491. The loonie strengthened 1.8 percent to C$1.3498 per euro, from C$1.3745 last week. Euro Stress Canada’s government bonds rose, pushing the 10-year yield lower by nine basis points to 2.87 percent, as the price of the 3.25 percent security due in June 2021 gained 76 cents to C$103.22. A basis point is 0.01 percentage point. The nation’s sovereign securities have returned 1.4 percent this month and are up 3.2 percent in 2011, according to the Bank of America Merrill Lynch data. The eight banks that failed the EU stress tests had a combined capital shortfall of 2.5 billion euros ($3.5 billion), regulators said. All banks tested in Italy, Germany, France, the U.K. and Ireland passed, the lenders said yesterday. The assessments are the first by the European Banking Authority since it was set up earlier this year. Last year’s tests by its predecessor were criticized for being insufficiently tough because banks were shown to need only 3.5 billion euros more capital, a 10th of the lowest analyst estimate. Banks that fail the stress test must present a plan to raise more capital within three months. Attractive Alternative Moody’s cut Ireland’s sovereign debt rating to junk July 12, making it the third euro-area country after Greece and Portugal to be rated below investment grade. “The flare-up in this market tension hasn’t been so extreme that we’ve seen a flight to safety and a type of environment that would be damaging to the Canadian dollar,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “We’ve still got a lot going on in Europe. We don’t have a resolution on the Greek austerity package.” The U.S. dollar dropped this week against 10 of its 16 major peers after Moody’s put the U.S. under review for a credit downgrade and S&P put the nation on Creditwatch negative, meaning there’s a one-in-two chance they may be cut in the next 90 days. The U.S. has the top investment rating from both companies -- Aaa at Moody’s and AAA at S&P. Canada has stable, top ratings from both companies. The Canadian dollar’s rally this week was buoyed by rising commodity prices. Gold reached a record of $1,594.90 an ounce July 14 and crude oil, Canada’s biggest export, rose 1.1 percent to $97.24 a barrel. Less Stress “Canada is still looking like a relatively attractive destination for foreign investors,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank in Toronto. “The stress tests add to the impression that Europe is bumbling along here and heading to a potential day of reckoning.” The loonie’s strength was tempered after Federal Reserve Chairman Ben S. Bernanke curbed speculation the central bank will debase the currency by buying additional assets. Bernanke spoke July 14 at a Senate Banking Committee hearing and said the increase in inflation this year is one reason why the Fed won’t immediately embark on a third round of bond-buying. “We’re not prepared at this point to take further action,” he said. The day before, Bernanke had signaled the central bank has more tools for monetary easing should the economy weaken and stymie efforts to generate jobs. Central Banks The Fed has kept its benchmark interest rate at a record low of zero to 0.25 percent since December 2008. During that time, the Bank of Canada has raised interest rate three times, to 1 percent. The disparity in the rates spurs investors seeking higher yields to buy Canadian assets instead of those denominated in dollars. Canada’s central bank meets July 19 and will keep its benchmark interest rate at 1 percent, according to the median estimate of 21 economists in a Bloomberg News survey. BOC policy makers in May said they will “eventually” raise rates as the economy recovers. The nation’s trade deficit narrowed to C$814 million ($854 million) in May, from a revised C$857 million a month earlier, Statistics Canada said July 12. The figure was in line with the C$800 million shortfall forecast in a Bloomberg survey of 23 economists. The loonie has weakened 0.7 percent this year versus the currencies of nine other developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Chris Fournier in Halifax, Nova Scotia at cfournier3@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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