TORONTO — The Canadian dollar soared a cent and a half Tuesday, retracing the previous day's big loss, on the strength of solid consumer activity and renewed doubts about the American dollar.

The loonie surged to a new 33 1/2-year high of 103.9 cents US but ended the session up 1.51 cents at 103.51 cents US., a day after a move by Bank of Canada governor David Dodge to talk down the currency had helped prod it down by 1.55 cents US.

"Yesterday's move looked a little bit exaggerated and I'd say today's move is probably to a degree exaggerated as well,'' Shaun Osborne, currency strategist at TD Securities, said Tuesday afternoon.

"But overall the trend toward a stronger Canadian dollar remains pretty much in place.''

Tuesday's gain came after Statistics Canada reported retail sales rose 0.7 per cent in August to $34.5 billion, after decreases in June and July. This suggested the economy and consumer sentiment maintained strength in spite of financial market unease.

"Even in the heart of the August credit turmoil and equity market swoon, Canadian consumers kept right on going,'' commented Douglas Porter of BMO Capital Markets.

"Looking ahead, consumer spending will be supported by rising wages, the strong likelihood of tax cuts, and the tantalizing probability of a windfall of lower prices thanks to the loonie's rampage.''

Camilla Sutton, currency strategist at Scotia Capital, said Monday's pullback in the currency had been provoked by a revival in the U.S. dollar amid risk-averse fears that global growth could slow and on Tuesday "we've seen the market really turn around and the U.S. dollar revert'' to its weakening trend.

"We've seen a much better day in terms of equities, which has returned the market's view to U.S. dollar weakness ahead,'' Sutton said.

"I think that's fair. You know, we have a (U.S. Federal Reserve) meeting next week that most likely will cut interest rates, and that should continue to drive some U.S. dollar weakness.''

For the Canadian dollar, regarded as a resource-dependent currency, a key factor is the price of oil. Tuesday's loonie strength came despite a slight slippage in the oil price -- which had tumbled by more than $1.00 a barrel on Monday after touching record highs of US$90 a barrel last week.

George Davis, senior technical analyst at RBC Capital Markets, noted "very aggressive buying'' of the Canadian dollar Tuesday.

"I think that people are reacting to overall U.S. dollar weakness,'' Davis said, "and there may be some potential merger-and-acquisition-related flows involved in this move as well.''

Cash is flooding into Canada as Rio Tinto pays investors for their Alcan Inc. shares to conclude the US$38.1-billion takeover of Canada's largest aluminum company. Those investors are expected to convert much of this money into Canadian dollars, increasing demand for loonies.

"We may have seen some of that flow this morning,'' TD's Osborne said.

"Volatility is the optimal word,'' he added. "We do think the trend will moderate ...but the risk in the short run certainly appears to be to the downside'' for the American dollar.

"Investors are still fairly negative on U.S. economic prospects.''

Apparently forgotten Tuesday was Dodge's weekend warning that the loonie's surge from 95 cents US at the beginning of September, up from 86 cents at the start of the year, was "abnormally quick'' and defies economic fundamentals.

"It's a difficult trend to fight,'' said Scotia Capital's Sutton.

"I would advise not trying to fight that trend and continue to play it to the upside until we really see it start to break down. And the catalyst could very well be (cheaper) oil, but we'll need a few more days to see whether or not that's going to come to fruition.''