The Canadian dollar set a 30-year-high Tuesday, closing at 98.64 cents US after investors got word of a drastic interest rate cut south of the border.

The loonie rose 1.36 cents higher than Monday's close as it traded on Toronto's financial market. The dollar went as high as 98.74 cents Tuesday afternoon,

Economists say it could only be a matter of days before the loonie reaches parity with the American dollar.

"You got the two ingredients, commodity prices and interest rate differentials, both going in the dollar's favour," said Don Drummond, chief economist for TD Bank speaking to CTV Newsnet Tuesday evening.

Speculation surrounding the rate cut and record oil prices helped push the dollar past yesterday's close of 97.28 cents US. But the real surge came after the U.S. Federal Reserve cut its key funds rate half a point to 4.75 per cent to curtail a possible recession.

The move by half a point was double the quarter point economists were expecting.

The move could lead American investors to doubt the state of the U.S. economy. But it made the Canadian dollar seem that much more attractive to foreign investors, said BNN's Michael Hainsworth, speaking to CTV Newsnet Tuesday afternoon.

With U.S. rates falling and Canadian rates remaining stable, foreign investors are looking at Canada as the ideal place to rest their money.

U.S. has been dealing with the partial collapse of their housing market plus a worsening credit crunch. In the meantime, Canada has benefited from record-setting crude oil prices and strong demand for metals, coal, chemicals, grain and other farm products.

"When money is cheap to borrow, that means companies will be able to do so, it's not going to cut into their bottom lines in the same degree," Hainsworth said. "That puts a lot of upward momentum on stocks."

The Canadian dollar has risen 13.9 per cent in 2007 against the greenback.

It hasn't passed 98 cents US since January 1977.

The value of the loonie is slightly exaggerated, Drummond said, explaining that commodity prices are out of sync with longer term trends.

"That has been the primary factor pushing the Canadian dollar up," he said.

Nonetheless, Drummond predicted the momentum would continue on the upswing.

"I don't think the Federal Reserve Board is done," he said. "They'll probably cut at their next meeting at the end of October and the Bank of Canada probably won't cut, at least not for a while.

Toronto's S&P/TSX composite index climbed 25.98 points to 13,835.84. The TSX Venture Exchange gave back 20.16 points to 2,729.12.

With files from The Canadian Press