C$1=US$1 for first time in 31 years

A Canadian one-dollar coin, known as a loonie, is seen against an American one-dollar bill in a file photo. The Canadian dollar hit parity with the U.S. dollar for the first time in 31 years on Thursday and is expected to remain strong, delighting Canadians used to being mocked for their ''northern peso.''

OTTAWA/TORONTO (Reuters) - The Canadian dollar hit parity with the U.S. dollar for the first time in 31 years on Thursday and is expected to remain strong, delighting Canadians used to being mocked for their "northern peso."

The loonie, so called because of the bird engraved on the one-dollar coin, capped a 62 percent rise from 2002 on the back of booming commodity prices and a deepening disenchantment with the greenback.

Canada, a major oil producer, is benefiting from record high oil prices and a China-led building boom that has boosted base metal prices.

"The huge increase in commodity prices in general have fed the acceleration of the Canadian dollar," said Carlos Leitao, chief economist at Laurentian Bank of Canada.

"The fact that economic growth in Asia and in general has accelerated has fed this large appetite for natural resources, particularly energy, which we have a lot of."

But the strong currency is seen as a huge threat to Canadian exporters and the parity benchmark adds to pressure on the Conservative government to help out manufacturers. Over 80 percent of Canada's exports are sold to the United States.

Finance Minister Jim Flaherty declined to talk the currency down, saying the real story was the "dramatic decline" in the U.S. dollar, but he said the rapid rise by the Canadian dollar also reflected the strongest economic fundamentals in the Group of Seven leading industrialized nations.

"Clearly they (the markets) are looking at the strength of the Canadian economy," he told a crush of reporters.

The high currency helps manufacturers buy equipment but the suddenness of its rise has put pressure on them, he said. He also acknowledged people had lost jobs but said they were finding other good employment because of economic strength.

The resource boom has coincided with the U.S. dollar's own broad-based decline, following the collapse of the tech bubble in 2001 and the growing U.S. budget and trade deficits, which contrast with Canada's surpluses.

The final push to the key level for Canada on Thursday came as the greenback hit a record low against the euro.

The momentum for Canada also comes from the narrowing of the spread between U.S. and Canadian interest rates after the U.S. Federal Reserve cut the federal funds rate by 50 basis points this week to 4.75 percent, bringing it closer to the Bank of Canada's 4.50 percent key rate.

The currency crept just above the US$1 level Thursday morning, and went as high as C$0.9992 to the U.S. dollar, or US$1.0008, according to the Bank of Canada. The currency finished the session at C$1.0013 to the U.S. dollar, or 99.87 U.S. cents.

The last time the two currencies were at par was in November 1976, the year Montreal hosted the Summer Olympics and Pierre Trudeau was prime minister.

NO STOPPING THE LOONIE

Dealers expect the loonie to continue to stay near par or above that, but were divided over just how high it will go and how long the rally will last.

"Once parity is achieved, there is nothing stopping the loonie," said Martin Lefebvre, senior economist at Desjardins Securities.

Steve Butler, currency strategist at Scotia Capital, said, "I don't want to say, well we're going to C$0.95 (to the U.S. dollar) or we're going to C$0.90, because it's much too soon to call a top, but I do think we have some further room for Canada to appreciate."

But most dealers who spoke to Reuters said the soaring loonie would not be sustained through 2008.

In the longer term, the U.S. dollar will have to rebound at some point, said Dustin Reid, senior foreign exchange strategist at ABN AMRO in Chicago. "It can't continue into oblivion forever."

The Canadian currency's climb from a low of 61.75 U.S. cents in 2002 has been embraced by a country that often feels itself in the economic and cultural shadow of its more powerful southern neighbor.

A straw poll of Canadians in central Ottawa showed their mood was as bright as the sunny weather.

"There's definitely a bit of pride. I have some American friends and they're always saying 'I got a Canadian quarter the other day. You owe me 10 cents'. So now it's like 'Yeah, yeah, we're even now'," said technical analyst Matthew Mellor.

(Additional reporting by Randall Palmer, David Ljunggren)