Toronto : Canada's dollar rose for the first time in three weeks against its US counterpart as the speed of the euro's decline encouraged investors to shift funds to countries with a healthier fiscal outlook.

The Canadian currency touched an eight-year high versus the euro last week as German Chancellor Angela Merkel said Europe is still in a "very, very serious situation" after governments agreed to an almost $1 trillion rescue programme.

Canada's consumer inflation accelerated in April, a government report is forecast to show this week.

"People are allocating out of Europe and buying the Canadian dollar," Sebastien Galy, a senior currency strategist at BNP Paribas SA in New York, said.

"The Canadian dollar was very, very resilient for the amount of shock that's gone through."

Canada's currency appreciated 0.8 per cent last week to C$1.0356 versus the greenback, from C$1.0439 on May 7, in the first weekly gain since the five days ended April 23.

One Canadian dollar bought 96.56 US cents.

Against counterparts

The loonie, as the Canadian currency is known for the image of the aquatic bird stamped on the C$1 coin, rose against most of its major counterparts last week, increasing 1.7 per cent to 89.29 yen and climbing 2.7 per cent to C$1.5051 versus the pound.

The Canadian dollar was one of the biggest losers Friday versus the greenback among the latter's 16 most-traded counterparts as the currencies of commodity-producing nations from Australia to South Africa to Brazil declined.

Futures for crude oil, Canada's biggest export, tumbled 4.7 per cent last week to $71.61 a barrel in New York on concern Europe's deficit turmoil will erode demand.

"If we get a collapse in oil, all bets are off," BNP Paribas's Galy said. "It'll be a negative terms-of-trade shock for Canada."

The nation's two-year notes were little changed last week after recouping losses Friday in the biggest intraday rally since May 6. The yield was 1.82 per cent, compared with 1.81 per cent a week earlier, after trading as high as 2.03 per cent on May 13.

Outpaced

The debt outpaced gains in two-year Treasuries Friday as traders pared bets that the Bank of Canada will increase its target lending rate from a record low 0.25 per cent on June 1.

Interest-rate swaps tied to short-term interest rates showed on May 5 a 68 per cent chance of a rate increase, down from total certainty on April 20, according to the latest prices from Credit Suisse Group AG.

"The way to characterise it is that markets internationally are gambling that central banks will struggle to hike rates in the next few months," Eric Lascelles, chief economics and rates strategist at Toronto Dominion Bank's TD Securities unit in Toronto said.

"You cherry-pick those countries that were seen as likely to hike in the next few months, and Canada is one of those. The US is not."

The yield advantage of two-year Canadian bonds over US debt narrowed Friday eight basis points, or 0.08 percentage point, to 105 basis points.

The government's 3.5 per cent security due in June 2020 rose 54 cents last week to C$100.59, pushing the yield 6 basis points lower to 3.43 per cent.