The Canadian dollar rallied sharply on Sept. 1 in response to a renewed appetite for risk in the global financial markets. But a generally softer tone is more likely over the next several months given the general economic uncertainty still pervading the globe, according to a currency analyst.

Matthew Strauss, senior currency strategist with RBC Capital Markets in Toronto, said strong economic data out of Australia and China led to an increased demand for riskier assets, including the Canadian dollar, on Sept. 1.

However, “the Canadian dollar is underperforming the other commodity-based currencies,” he said, attributing that slower pace to Canada’s proximity to the U. S. and the fact that U. S. economic data remains on the weaker side overall.

The Canadian dollar has moved past some important chart levels, which could suggest some further short-term strength, he said, but the medium-term outlook was still “fairly cautious.”

Uncertainty with the U. S. and European economic recoveries, and how the economic data will unfold over the next few months, will keep the currency trade on the cautious side, he said.

The Canadian dollar could continue to see some short-term rallies, but he noted that any such strength would be seen as selling opportunities.

The currency could weaken to the US92-to 93-cent level in the next month or two, due to the generally disappointing global economic environment and the fact that Canada is a relatively small player in that global market.

Once that period of uncertainty is past, Strauss said, the Canadian dollar could start strengthening in 2011.

The Bank of Canada releases its next interest rate announcement Sept. 8. Market participants are currently split on whether the bank will raise rates by 25 points, he said.

No matter the outcome, someone will be caught off guard, which could provide some short-term direction for the Canadian dollar, said Strauss.