CANADA FX DEBT-C$ hits 4-year low as central bank concerns weigh

* Canadian dollar at C$1.0972 or 91.14 U.S. cents
    * Bond prices mostly lower across maturity curve

    By Leah Schnurr
    TORONTO, Jan 21 (Reuters) - The Canadian dollar fell to a
four-year low against the greenback on Tuesday, breaking through
the psychologically important C$1.10 level before clawing back
some ground, as investors speculated about the path of monetary
policy on both sides of the border.
    The loonie backed off the session's lows after data showed
Canadian manufacturing sales rose more than expected in November
to their highest in almost two years. 
    The currency was hit overnight by a rise in the U.S. dollar
on conjecture that the U.S. Federal Reserve might further scale
back its economic stimulus program. The Wall Street Journal said
that the Fed may trim its bond purchases to $65 billion a month
from the current $75 billion when it meets at the end of
    A swifter pace of unwinding the Fed's quantitative easing
program is seen as a negative for the Canadian dollar as it will
likely boost investor appetite for the U.S. currency.
    At the same time, concerns that the Bank of Canada could
sound more dovish when it announces its latest interest-rate
decision on Wednesday drove the loonie lower. 
    The Bank of Canada shifted gears late last year, dropping
any talk of rate hikes after 18 months of signaling that policy
tightening was on the horizon. The change has weighed heavily on
the Canadian dollar, with the U.S. dollar appreciating more than
3 percent against the loonie just three weeks into 2014.
    The greenback has gained more than 6 percent against the
Canadian currency since the Bank of Canada first signaled its
policy shift last October.
    "The sentiment does continue to be quite firmly against
Canada," said Don Mikolich, executive director of foreign
exchange sales at CIBC World Markets in Toronto.
    After some disappointing economic data earlier this month,
including a surprise increase in the unemployment rate, markets
are positioning for the Bank of Canada to take a more dovish
tone on Wednesday.
    "They've been comfortable to see the currency weaken off to
a certain level," Mikolich said. "It's hard to say what levels
they have in mind, ultimately, but I don't think we're there
    The Canadian dollar ended the North American
session at C$1.0972 to the greenback, or 91.14 U.S. cents,
weaker than Monday's close of C$1.0951, or 91.32 U.S. cents. It
fell as low as C$1.1019, its lowest level since September 2009.
    The Canadian dollar trimmed declines after data showed
factory sales jumped 1 percent in November, though a separate
report showed wholesale trade was flat in the same month.
    As well as a decision on interest rates, the Bank of Canada
will release its Monetary Policy Report, providing a quarterly
update of its economic forecasts. The central bank is widely
expected to keep rates at 1 percent.
    With the large amount in short positions against the
Canadian dollar, the U.S. dollar-Canadian dollar pairing could
be in for a retracement if the Bank of Canada is not as dovish
as the market expects, said Gareth Sylvester, director at
Klarity FX in San Francisco.
    "Canadian dollar shorts are certainly getting to extreme
levels. I think the market has priced in a particular dovish
tone tomorrow, and in the absence of a more pessimistic outlook,
the market may be setting itself up for a bit of a fall,"
Sylvester said.
    Canadian government bond prices were mostly lower across the
maturity curve, with the two-year off 2 Canadian
cents to yield 1.027 percent, and the benchmark 10-year
 down 12 Canadian cents to yield 2.507 percent.