10/11/2011 08:36 EDT | Updated 12/11/2011 05:12 EST

Loonie rises as greenback strengthens amid moves to shore up European banks

TORONTO - The Canadian dollar jumped almost a full U.S. cent Tuesday as the currency drew strength from moves by Germany and France to shore up Europe's banks.

The loonie jumped 0.98 of a cent from Friday's close to 97.29 cents US.

German Chancellor Angela Merkel and French President Nicolas Sarkozy announced over the weekend that they would finalize a "comprehensive response" to the debt crisis by the end of the month, including a plan to make sure that Europe's banks have adequate capital.

"The reaction to this commitment has been fairly strong, suggesting how desperate the market is for a light at the end of the tunnel," said Camilla Sutton, chief currency strategist for Scotia Capital.

Meanwhile, word came out shortly after the market close that Slovakia's Parliament had rejected the expansion of the euro currency zone's bailout fund for heavily indebted governments. Sixteen other eurozone parliaments had already approved the measure. There had been doubt about the results of the vote after that country's coalition leaders failed to agree on a deal to approve the measure.

The changes would allow the fund to buy government bonds and to provide a backstop to European banks.

The 17 countries that use the euro must all approve expanding the powers of the bailout fund, which is designed to shore up Europe's defences against the debt crisis.

In other European developments, Greece’s international debt inspectors have completed their review of the government’s reforms. The inspectors from the International Monetary Fund, European Commission and European Central Bank say that if their conclusions are adopted by the eurozone and IMF, Athens is likely to receive the next batch of its bailout loans in early November.

The loonie also advanced amid news that the pace of home construction picked up sharply last month.

Canada Mortgage and Housing Corp. said housing starts rose to a seasonally adjusted annual rate of 205,900-thousand units. Strength was focused in the Atlantic region, Quebec and British Columbia and concentrated on multiple-unit urban starts such as condos, which increased 14.2 per cent.

Higher oil prices also supported the loonie while the November crude contract on the New York Mercantile Exchange gained 40 cents to US$85.81 a barrel on top of a gain of almost $2.50 on Monday.

Other commodity prices softened after making solid advances Monday with the December copper contract down eight cents to US$3.29 a pound while the December bullion contract in New York declined $9.80 to US$1,661 an ounce.