CANADA FX DEBT-C$ sinks to 5-1/2 year lows as central bank seen dovish

* Canadian dollar at C$1.2027 or 83.15 U.S. cents
    * Bond prices mostly lower across the maturity curve

    By Solarina Ho
    TORONTO, Jan 16 (Reuters) - The Canadian dollar retreated to
a 5-1/2 year low against its U.S. counterpart on Friday on broad
U.S. dollar strength and expectations of a dovish Bank of Canada
report next week.    
    Some market participants predicted the Bank of Canada's
Monetary Policy Report will show a pullback in the bank's growth
and inflation forecasts, and that helped weaken the loonie
through the key level of C$1.20 to the U.S. dollar.
    "We are running into decent interest now that we've been
above C$1.20, so that has put a cap for now," said Blake
Jespersen, managing director, foreign exchange sales, at BMO
Capital Markets.
    "But now that we have the market pricing in a higher
likelihood of a (rate) cut by the Bank of Canada this year, that
is going to weigh on the Canadian dollar over the short term."
    Foreign exchange markets were still reeling from the Swiss
central bank's stunning move on Thursday to remove its ceiling
on the franc's value against the euro, and investors took the
move as a sign the European Central Bank will opt for
quantitative easing at its policy meeting next week. 
    The Canadian dollar was broadly weaker against most
of its currency counterparts except the Swiss franc 
and the euro. Against the U.S. dollar, it was trading
at C$1.2027, or 83.15 U.S. cents, weaker than Thursday's close
of C$1.1964, or 83.58 U.S. cents.
    At one point the currency softened to C$1.2047, or 83 U.S.
cents, its weakest level since the end of April 2009.
    The commodities-linked loonie brushed off a move higher by
crude oil, which rose on comments by the International Energy
Agency that there were already signs the market selloff would
end. Canada is a major oil exporter. 
    "Oil has been the driver over the past few months but ...
that correlation at least for the very, very short term has
broken apart," Jespersen said. "Now interest rates and overall
flight to quality have trumped that."
    Canadian government bond prices were mostly lower across the
maturity curve, with the two-year falling 5.5
Canadian cents to yield 0.839 percent and the benchmark 10-year
 declining 22 Canadian cents to yield 1.492 percent.

 (Editing by Peter Galloway)