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* C$ ends lower at 98.61 U.S. cents
* Market awaits Bank of Canada statement on Tuesday
* Bonds prices follow U.S. Treasuries higher (Updates to close, adds details)
By Jennifer Kwan
TORONTO, Oct 18 (Reuters) - The Canadian dollar dropped against the U.S. dollar on Monday, slipping further from its recent flirtation with parity, ahead of the Bank of Canada's interest rate decision on Tuesday.
The market is pricing in a near certainty that the central bank will hold its overnight target rate at 1.0 percent, while the tone of its statement will be closely followed for further direction. [ID:nN15144891]
The currency was a "laggard today" in anticipation of potentially dovish news to accompany the Bank of Canada's policy decision, and the central bank's Monetary Policy Report on Wednesday, said Jack Spitz, managing director of foreign exchange at National Bank Financial.
"With rate hike expectations completely taken off the table now for the bank, the market focus will be on the wording and any downscaling of Canadian and global economic forecasts will ultimately hit the Canadian dollar," he said.
Earlier on Monday, the Canadian dollar CAD=D4 fell as much as a penny to C$1.0229 to the U.S. dollar, or 97.76 U.S. cents before recovering somewhat as commodity and equity prices climbed, while the greenback weakened. [MKTS/GLOB] [FRX]
It ended the session at C$1.0141 against the U.S. dollar, or 98.61 U.S. cents, down from Friday's finish at C$1.0118 to the U.S. dollar, or 98.83 U.S. cents
Many forecasters expect the central bank will stand pat on rates until 2011 after three increases this year. Markets are pricing in a 90 percent probability that the overnight rate will remain unchanged on Tuesday, according to a Reuters calculation based on yields on overnight index swaps. [CA/POLL] BOCWATCH
"I think it's largely priced in the bank will pause, so the question is what kind of pause is it. Is it a pause that lasts or is it a pause that leaves open the option of raising rates again?" said Michael Gregory, senior economist at BMO Capital Markets.
"Anything that suggests that this pause is going to last very long, that's going to weigh a bit on the currency. Anything that suggests the Bank of Canada is holding close the option of resuming the rate hikes at some point, that helps the Canadian dollar."
More broadly, the expectation of quantitative easing by the Federal Reserve -- essentially creating new money to buy assets -- had recently been driving the U.S. dollar lower and higher-yielding currencies, such as Canada's, higher.
As a result, the Canadian dollar cracked parity against the greenback last week.
Spitz said he is eyeing key technical ranges of resistance at C$1.0230 to the U.S. dollar, and support at C$1.0140-C$1.0110.
Canadian bonds rose along with U.S. Treasuries, which climbed as bargain hunters emerged after recent losses and the Federal Reserve bought more medium-term notes to maintain ample cash in the banking system. [US/]
The two-year bond CA2YT=RR was up 3 Canadian cents to yield 1.418 percent, while the 10-year bond CA10YT=RR rose 28 Canadian cents to yield 2.761 percent. (Additional reporting by Claire Sibonney)