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Canadian stocks, dollar advance as Trudeau election win clears uncertainty

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(Updates prices to close)

* TSX advances 0.5%

* Loonie strengthens 0.2% against the greenback

* Canadian 10-year yield edges nearly 1 basis point higher

By Fergal Smith

TORONTO, Sept 21 (Reuters) - Canada's main stock market rallied on Tuesday and the dollar edged higher against its U.S. counterpart, as the re-election of Prime Minister Justin Trudeau's Liberals reassured investors that the outlook for the economy would continue to improve.

The Toronto Stock Exchange's S&P/TSX composite index ended up 89.75 points, or 0.5%, at 20,244.29, recovering from its lowest closing level in nearly two months the day before.

It was business as usual in Canada after Trudeau fell short of winning a parliamentary majority in a tightly contested federal election, leaving him dependent again on opposition legislators to govern.

The status quo was welcomed by the market, said Sadiq Adatia, chief investment officer at BMO Asset Management.

Investors are "happy to see that the economy will continue to move forward and the reopening plans will continue to move in the direction that's already in place," Adatia said.

Gains for the TSX came as global financial markets stabilized following heavy selling on Monday. Investors were assessing the level of contagion stemming from the distress of developer China Evergrande and awaiting Wednesday's interest rate decision by the U.S. Federal Reserve.

The Canadian dollar, which has largely been on the defensive since June, was trading 0.2% higher at 1.2805 to the greenback, or 78.09 U.S. cents.

"Unlike most high-income countries, Canada is unlikely to embark on near-term fiscal consolidation," Marc Chandler, chief market strategist at Bannockburn Global Forex, said in a note.

"A policy mix of tighter monetary policy and relatively looser fiscal policy tends to be supportive of the currency."

The Liberals have pledged a substantial C$78 billion in new spending over five years, while analysts expect the Bank of Canada to further reduce its bond purchases as soon as next month.

The Canadian 10-year yield was up nearly 1 basis point at 1.232%. (Reporting by Fergal Smith; Editing by Aurora Ellis and Peter Cooney)

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