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* Canadian dollar at C$1.0700 or 93.46 U.S. cents * Inflation 0.9 pct in Nov, core 1.1 pct * Bond prices higher across the maturity curve By Leah Schnurr TORONTO, Dec 20 (Reuters) - The Canadian dollar weakened to a 3-1/2-year low against the greenback on Friday after data showing a deceleration in domestic annual core inflation underscored expectations interest rates will stay low for some time. Canada's annual overall inflation rate edged higher last month, though it remained below the Bank of Canada's target range. But core inflation, which strips out volatile items and is watched by the central bank, slipped on the month. A more neutral policy shift from the Bank of Canada has weighed on the loonie in recent months as investors pushed their expectations for when interest rates will rise further out into the future. The currency has lost about 4 percent since late October when the Bank of Canada dropped its tightening bias. Friday's inflation report "helps fuel the growing narrative that the Bank of Canada is becoming increasingly more dovish," said Mazen Issa, macro strategist at TD Securities in Toronto. "Certainly the risk that the Bank adopts an explicit easing bias in January continues to grow and this report provides lends further credence to that view." The Canadian dollar was at C$1.0700 to the greenback, or 93.46 U.S. cents, weaker than Thursday's close of C$1.0666, or 93.76 U.S. cents. The currency traded as far as C$1.0737, its lowest level since May 2010. Analysts expect there should be technical support around the C$1.07 level. Both the total and core inflation rates were below market expectations. Inflation has been below the Bank of Canada's 2 percent target for 19 months. "It now looks like core inflation is going to average about two-tenths below what the Bank of Canada expected in the fourth quarter, possibly three-tenths below - so it's a fairly big miss by the Bank on core inflation," said Doug Porter, chief economist at BMO Capital Markets in Toronto. Investors were also taking in separate data that showed Canadian retail sales unexpectedly fell in October. Canadian government bond prices were higher across the maturity curve, with the two-year up 3 Canadian cents to yield 1.22 percent and the benchmark 10-year up 20 Canadian cents to yield 2.679 percent.