The Canadian dollar jumped almost a full cent Tuesday on speculation that the U.S. Federal Reserve may cut its key lending rate by as much as half a percentage point next week.

The loonie was quoted at 95.99 cents US at the close of trading, up 0.98 cents from Monday's close. Earlier in the day, the dollar traded as high as 96.06 cents US. The loonie hit a 30-year intraday high of 96.70 cents US on July 24.

U.S. Federal Reserve governor Frederic Mishkin, seen in an undated photo, made comments Monday night that have may have helped the Canadian dollar to rise.
(Associated Press)

Remarks from a key Fed official helped to reinforce market sentiment that the U.S. central bank may cut its overnight lending rate to 4.75 per cent from the current 5.25 per cent on Sept. 18.

That would narrow the spread between the Fed's rate and the 4.50 per cent rate the Bank of Canada targets as its overnight rate — something that would support the Canadian currency.

"Economic activity could be affected more severely in other sectors should heightened uncertainty lead to to a broader pullback in household and business spending," Fed governor Frederic Mishkin said in remarks to a New York audience Monday night.

"That scenario cannot, in my view, be ruled out, and I believe it poses an important downside risk to economic activity," he said.

Fed chair Ben Bernanke made no mention of the state of the U.S. economy or U.S. interest rates in a Tuesday speech in Berlin.  

Last month, market observers had been expecting the Fed would cut its key rate by a quarter of a percentage point. But after the release of monthly employment figures last Friday that showed the U.S. lost jobs for the first time in four years, many analysts now see the central bank now opting for a half-point cut.

Several pieces of Canadian economic data released Tuesday also supported the loonie. New home prices continue to rise and home building activity remains strong, showing that the Canadian housing sector shows little of the damage seen south of the border. Trade figures showed that domestic demand also remains strong in Canada, with imports rising.

The Bank of Canada left its key overnight rate unchanged last week. Market watchers are divided on which direction it will move after that.