* C$ ends at $0.9895 vs US$ or US$1.0106
* Highest close since Sept. 16
* ECB bank loans boost sentiment
* Bond prices mostly lower
By Jon Cook
TORONTO, Feb 29 (Reuters) - The Canadian dollar rose to its highest level in more than five months against the U.S. currency on Wednesday, boosted by a massive euro-zone liquidity injection by the European Central Bank and favorable month-end purchases by institutional investors.
Around 800 banks took 530 billion euros ($708.98 billion) at the ECB's second offering of three-year funding, essentially in line with market expectations, driving demand for higher yielding currencies at the expense of the euro.
"It should be bearish for the euro because it is a form of quantitative easing," said Jack Spitz, managing director of foreign exchange trading at National Bank Financial.
Quantitative easing is essentially the creation of new money by central banks to help stimulate economic growth.
"The move to buy the Canadian dollar was predominantly on the back of asset managers rebalancing hedge flows in addition to the ECB," Spitz said.
On Wednesday, the euro fell 1.6 percent against the Canadian dollar, its biggest single-day drop in nearly 10 months.
The Canadian dollar finished the at C$0.9895 versus the greenback, or US$1.0106, up from Tuesday's North American session finish of C$0.9954, or $1.0046. It was its highest close since Sept. 16.
Spitz said most of the Canadian dollar's gain came after the currency breached last week's high of C$0.9907, but that he expected resistance around the C$0.9905 level to develop in the future.
The currency jumped as high as C$0.9844, or $1.0166, before retreating after U.S. Federal Reserve Chairman Ben Bernanke offered only a tempered view of the U.S. economy.
Gold prices fell 3 percent as the U.S. dollar rallied after Bernanke said the decline in the U.S. unemployment rate has surprised economists.
"Some of Canada's gains have been offset by weakness being seen in certain markets - gold is down quite dramatically today," Spitz said.
Canadian bond prices were mostly lower, with the two-year bond down 5 Canadian cents to yield 1.098 percent. The 10-year bond fell 12 Canadian cents to yield 1.988 percent.