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* C$ at C$1.0289 against U.S. currency * Canadian inflation down a tad, as expected, in August * Canadian bond prices mostly higher across the curve By Leah Schnurr TORONTO, Sept 20 (Reuters) - The Canadian dollar weakened on Friday as investors tried to gauge how long the U.S. central bank will keep its economic stimulus in place, while an inflation report at home reinforced the view Canadian interest rates will stay low for some time. Canada's annual inflation rate edged down in August to 1.1 percent from 1.3 percent in July, as expected, giving the Bank of Canada plenty of space to remain accommodative. The central bank is expected to keep its benchmark interest rate on hold at 1.0 percent - where it has been since September 2010 - well into next year, as long as inflation is muted. "The implication from that is that the Bank of Canada should have lots of breathing room to remain sidelined to nurture the broader economic recovery," said Mazen Issa, macro strategist at TD Securities. For the most part, the report did not change expectations that the central bank will keep rates steady at its next meeting in October. The Canadian dollar was at C$1.0289 to the U.S. dollar, or 97.19 U.S. cents, weaker than Thursday's session close of C$1.0262, or 97.45 U.S. cents. Investors continued to digest a decision from the U.S. Federal Reserve earlier in the week to maintain its $85 billion a month in bond purchases, a move which surprised economists and investors who had expected the Fed to modestly reduce the amount of purchases. The Canadian dollar surged in the immediate aftermath of the announcement, touching a three-month high, but has pulled back since. By Friday, the U.S. dollar was edging off its lows and was up 0.1 percent against a basket of currencies. "At this point there's questions about more transparency, and what exactly (Fed Chairman Ben) Bernanke's thinking was in terms of the Fed's quantitative easing program still remains elusive," said Issa. "There may be some hesitancy to take any outsized positions." Analysts will be scrutinizing a round of speeches from Fed members scheduled for Friday for further insight into how much longer the Fed will continue stimulus. St. Louis Fed President James Bullard said in an interview early Friday the Fed could still reduce its bond buying at its meeting in October if data points to a stronger economy. Prices for Canadian government bonds were mostly higher across the maturity curve, with the two-year bond up 4 and a half Canadian cents to yield 1.232 percent, and the benchmark 10-year bond was unchanged to yield 2.713 percent.