TORONTO (Reuters) – Canada's dollar looks set to bounce back above its US counterpart for the second time this year, but a slowing economy and flat Canadian interest rates suggest a short-lived rally with little underlying strength.

The Canadian dollar hit 99.89 US cents yesterday, its highest level against the greenback since April 27.

The currency was swept up in a broad-based sell-off of the US dollar caused by expectations the US Federal Reserve will ease policy further by creating new money to buy assets.

But that's only likely to offer a short-term gain for the Canadian dollar, which is hugely dependent on commodity prices and exports, especially to the United States.

"We are starting to see some softer data coming to Canada at the moment so I think that, at the margin, is probably going to temper some of the upside potential in the Canadian dollar," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

Osborne questioned whether the commodity price rally that took the Thomson Reuters-Jefferies CRB index to a two-year high has much further to climb in the near term. He forecast the Canadian dollar will end 2010 at about 98 US cents.

That's in line with the median one-, six- and 12-month forecasts in a recent Reuters poll

The Canadian dollar had stretches above the greenback in 2007, 2008 and 2010, including a brief period in November 2007 when it climbed to a modern-day high near $1.10.

It returned to a one-for-one footing with the US dollar on April 6 this year, boosted by rising commodity prices and expectations Canadian interest rates would rise.

But that rally lasted less than a month as Europe's sovereign debt crisis sent commodity-based currencies tumbling. It hit a 2010 low of 92.13 US cents on May 25.