10/12/2011 08:47 EDT | Updated 12/12/2011 05:12 EST

Canadian dollar, commodities rise on hopes for EU debt crisis plan

TORONTO - The Canadian dollar shot up more than a full U.S. cent Wednesday as traders took on more risk on hopes that European leaders are moving to deal with undercapitalized banks.

The loonie jumped 1.01 cents to 98.3 cents US on top of a gain of just under a cent on Tuesday. The dollar closed off early highs of 98.69 cents US as oil prices lost early gains.

The president of the European Commission said Wednesday that banks should temporarily increase their capital buffers to better withstand the crisis. Jose-Manuel Barroso said if banks can’t raise the capital on the market, they should get help from governments, who in turn can tap the eurozone bailout fund.

Barroso also called for a permanent bailout fund, the European Stability Mechanism, to come into force in mid-2012, one year ahead of schedule.

"(It was) not so much a map as a finger pointed in the general direction of where policy makers need to head," observed Stewart Hall, a currency strategist at RBC Capital Markets.

The plan from the EU comes a day after Slovakia rejected a bill that would have given more power to Europe’s financial rescue program. Sixteen other countries that use the euro have already approved the bill, but the measure requires unanimous support. Investors predict the bill will ultimately pass.

Financial markets have been volatile in recent weeks amid worries that banks could take big losses on bonds they own issued by governments with shaky finances, like Greece. That uncertainty is stifling lending — both between banks and to the wider economy — which threatens to throw the 17-country eurozone into a new recession and derail a fragile global economic recovery.

Oil prices snapped a five-session run of gains that sent oil up 7.7 per cent as the November crude contract on the New York Mercantile Exchange slipped 24 cents to US$85.57.

Rising confidence that a comprehensive proposal for dealing with the debt crisis is finally at hand sent metal prices higher.

But metal prices were up sharply with the December contract on the Nymex ahead 10 cents to US$3.39 a pound.

Bullion prices also charged ahead as December gold ran up $21.60 to US$1,682.60 an ounce.