CANADA FX DEBT-Canadian dollar rallies the most in three months as Canada avoids another election

By Fergal Smith

TORONTO, Nov 18 (Reuters) - The Canadian dollar strengthened to a near three-week high against its U.S. counterpart on Tuesday as Wall Street clawed back much of its earlier declines and some major domestic political uncertainty cleared.

The loonie CAD= was trading 0.5% higher at 1.3980 per U.S. dollar, or 71.53 U.S. cents, after touching its strongest intraday level since October 30 at 1.3972. The gain was the largest among the Group of 10 currencies and the largest for the loonie since August 22.

The Canadian Parliament on Monday narrowly voted in favor of Prime Minister Mark Carney's first budget, staving off the threat of a second election in less than a year. The budget proposed doubling the fiscal deficit to counter U.S. tariffs as well as to fund defense and housing programs.

"The market is a little bit relieved there's not an election coming," said Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull. "Add to that, stocks are storming back now."

U.S. stocks pared earlier losses that were driven by concerns over lofty equity valuations and dimming prospects of a December interest rate cut from the Federal Reserve.

Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to the signal that stocks send about the economic outlook.

U.S. crude oil futures CLc1 were trading 1.4% higher at $60.73 a barrel as traders weighed the impact of Western sanctions on Russian oil flows against an expected supply surplus next year.

Domestic data had little impact. It showed that housing starts fell 17% in October from the previous month to a seasonally adjusted annualized rate of 232,765 units.

Canadian bond yields edged higher across a steeper curve. The 10-year CA10YT=RR was up 1.7 basis points at 3.256%, after earlier touching its highest level since September 8 at 3.269%.