CANADA FX DEBT-C$ hits 3-yr low as investors eye Bank of Canada policy decision

* C$ at C$1.0664 vs US$, or 93.84 U.S. cents
    * C$ a 3-year low against US$, weaker vs most other
    * Bond prices higher across the maturity curve

    By Leah Schnurr
    TORONTO, Dec 3 (Reuters) - The Canadian dollar hit its
lowest level in more than three years on Tuesday on investor
concern that the Bank of Canada would strike a more dovish tone
in a policy decision due later this week, and on views the
United States could reduce its stimulus sooner rather than
    The currency has fallen in four of its last five sessions,
dropping through key support levels as bearish sentiment builds.
    The Bank of Canada will release its interest rate and policy
decision on Wednesday following its first meeting since a policy
shift in October, when the central bank dropped any mention of a
rate hike.
    That change pushed out market expectations for the next rate
hike into 2015. Rates have been at 1 percent since 2010.
    Analysts say that while they are not expecting the central
bank to take a more dovish tone on Wednesday, markets are
pricing in that risk.
    "There's definitely a risk that they could be on the dovish
side of things. I wouldn't say that I'm necessarily in that
camp," said Scott Smith, senior market analyst at Cambridge
Mercantile Group in Calgary. 
    He said that while October's inflation reading came in below
expectations, core inflation - which strips out volatile items
and is closely watched by the central bank - was more firm.
    The Canadian dollar was at C$1.0656 to the
greenback, or 93.84 U.S. cents, weaker than Monday's close of
C$1.0641 or 93.98 U.S. cents.
    The loonie traded as far as C$1.0664, its lowest level since
the end of August 2010. The low previously hit this year in July
at C$1.0609 had represented significant support for the
currency, which it first broke through late last week.
    "Right now is a pretty key level, just being a fresh cycle
high. If we push through here, it could get a lot uglier for the
Canadian dollar," said Smith.
    If the loonie pushes through current levels, C$1.07 will be
the next one to watch, Smith said.
    The Canadian dollar was also weak against most of its other
major currency parings, including the euro and the British pound
after data showed Britain's construction sector unexpectedly
picked up more speed in November. 
    The euro hit an 3-1/2-year high against the
Canadian dollar, while the pound was at a 4-year
    Investors will also be taking in a number of economic
reports out of the United States this week, including consumer
sentiment, third-quarter gross domestic product and the
closely-watched unemployment report.
    The data this week could be key in calibrating market
expectations for when the Federal Reserve may start to wind down
its economic stimulus. 
    Investors are trying to gauge whether the Fed will start to
reduce its amount of bond purchases at its next meeting later in
December or hold off until the new year.
    Monday's better-than-expected factory data has boosted
sentiment that there is an outside chance the start of tapering
could come in December, said Smith. 
    The two-year bond was up 5 Canadian cents to
yield 1.083 percent, while the benchmark 10-year bond
 rose 23 Canadian cents to yield 2.579 percent.