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TORONTO (Reuters) - Canada's dollar was little changed against the U.S. dollar on Thursday, pausing after a recent rally as investors waited to see whether the U.S. Federal Reserve announces a new round of money-printing.
Analysts say the market is largely priced for the Fed to launch a third round of quantitative easing, or QE3, on Thursday while signaling that a weak U.S. economy may warrant ultra-low interest rates for at least another three years.
Not everyone believes the Fed will embark on a bond-buying spree, and plenty of doubts remain about the likely efficacy of such a move.
"If we don't get QE ... then we should see a big (U.S. dollar) selloff across the board and that would see (U.S.) dollar/CAD pushing higher," said Elsa Lignos, senior currency strategist at RBC Capital Markets in London.
The Federal Open Market Committee announces its decision at about 12:30 p.m. ET (1630 GMT) at the close of a two-day meeting. Fed Chairman Ben Bernanke will then discuss the Fed's decision during a news conference at 2:15 p.m.
"Of course Bernanke may then come out ... and perhaps signal that QE could be coming at the next FOMC meeting, but in that two-hour period it would be a lot of weakness for the Canadian dollar," added Lignos.
If the Fed does in fact launch a large and open-ended bond-buying program, markets then expect to see the current U.S. dollar weakness momentum being maintained and the Canadian dollar could test its 13-month highs seen earlier this week.
At 8:08 a.m., the currency stood at C$0.9756 versus the U.S. dollar, or $1.0250, a tad firmer than Wednesday's North American session close at C$0.9766 versus the greenback, or $1.0240.
Lignos noted Canadian-dollar resistance around C$0.9728 and C$0.9634, and support near C$0.9800, C$0.9886, followed by parity.
Canada's dollar hit its strongest level since August 2011 on Tuesday, propelled by a confluence of factors, including Fed stimulus expectations, a hawkish Bank of Canada stance, strong domestic job figures and a bond buyback plan announced by the European Central Bank.
Ahead of the Fed, investors will also be watching U.S. weekly jobless claims and the Canadian new house price index for July, both due at 8:30 a.m.
Canadian government bond prices advanced across the curve, tracking U.S. Treasuries higher. <US/>
The two-year bond rose 3 Canadian cents to yield 1.170 percent and the benchmark 10-year bond gained 26 Canadian cents, yielding 1.875 percent.
Editing by Dave Zimmerman