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* C$ touches as low as 96.39 U.S. cents
* Bank of Canada holds rates steady at 1 pct
* Bonds higher across curve on rate pause expectations (Adds details, quotes)
By Jennifer Kwan
TORONTO, Oct 19 (Reuters) - Canada's dollar fell more than 2 U.S. cents to its lowest level in more than three weeks against the U.S. dollar on Tuesday after the Bank of Canada left interest rates unchanged and cut its economic growth forecast.
The Canadian currency CAD=D4 touched C$1.0374 to the U.S. dollar, or 96.39 U.S. cents, its lowest level since Sept. 23. On Monday, it finished at C$1.0141, or 98.61 U.S. cents.
The Bank of Canada kept its benchmark interest rate unchanged at 1 percent, as expected, and cut its growth forecasts for 2010 and 2011 due to a slower than expected global economic recovery, saying "The economic outlook for Canada has changed." [ID:nN19118876] For full text, please see: [ID:nN19118393]
The central bank, which had raised the rate three times since June, also said inflation would be softer than expected.
"'The economic outlook for Canada has changed.' That's different: The bank expects the economic recovery to be more gradual than it had projected," said John Curran, senior vice president at CanadianForex.
"For them to come out and say that, that's making me think there's not going to be a rate hike any time soon and (the Canadian dollar) is going to suffer for it."
Most of Canada's primary securities dealers forecast on Tuesday that the Bank of Canada will keep interest rates unchanged into early 2011. [CA/POLL]
Currencies usually strengthen as rates rise as higher rates attract capital flows.
At 12:24 p.m. (1624 GMT), the Canadian dollar stood at C$1.0308 to the U.S. dollar, or 97.01 U.S. cents.
The Canadian dollar had already begun its descent before the Bank of Canada move, dragged lower after China's central bank surprised the market with its first increase in interest rates in nearly three years, a move that reflects its concern about rising domestic asset prices and stubborn inflation. [ID:nTOE63E07V]
China's move rattled currency investors, which cut exposure to risk by selling the euro and commodity-sensitive currencies such as the Australian dollar, while taking refuge in the U.S. dollar. [FRX/]
Investors feared China's rate rise could dampen Chinese and global growth and slow China's voracious demand for commodities. [ID:nBJI002412]
As a result, U.S. crude oil future prices fell more than $2, while gold and base metals prices also faltered. [O/R] [GOL/] [MET/L]
"I certainly think given all the events that have happened this morning, with China raising rates, it's certainly not good for the commodity currencies and probably puts the topside in Canada to be vulnerable," said Steve Butler, director of foreign exchange trading at Scotia Capital.
Canadian government debt prices were higher as rate hike expectations diminished and the outlook for economic growth dimmed, said Fergal Smith, managing market strategist at Action Economics.
"The front of the curve and the belly of the curve have outperformed because they're more sensitive to the Bank of Canada's policy trajectory," Smith said.
The two-year bond CA2YT=RR climbed 10 Canadian cents to yield 1.368 percent, while the 10-year bond CA10YT=RR climbed 34 Canadian cents to yield 2.719 percent. (Additional reporting by Ka Yan Ng and Claire Sibonney; editing by Peter Galloway)