* C$ falls to 99.14 U.S. cents
* Bonds lower but outperform Treasuries (Updates to afternoon)
By Claire Sibonney
TORONTO, Dec 7 (Reuters) - The Canadian dollar retreated further on Tuesday after the Bank of Canada held its key interest rate steady and the market digested a statement widely seen as dovish.
The central bank, as expected, set the stage for rates to pause at 1 percent for some time by emphasizing its concern over weaker exports and the risks posed by Europe's debt woes. [ID:nN07106511]
At 1:17 p.m. (1817 GMT), the Canadian dollar CAD=D4 was at C$1.0087 to the U.S. dollar, or 99.14 U.S. cents, compared with C$1.0027, or 99.73 U.S. cents right before the announcement.
It was also down from Monday's close at C$1.0053 to the U.S. dollar, or 99.47 U.S. cents.
"Again, they were focusing on the strength of the Canadian dollar, the impact on net exports, the sluggish U.S. economy," said David Watt, senior fixed income and currency strategist at RBC Capital Markets.
"So they didn't go out of their way to indicate they are uncomfortable on the sidelines."
Overnight, the currency had flirted with parity, climbing to a session high of C$1.0011 to the U.S. dollar, or 99.89 U.S. cents, as global equities and commodities rallied on the back of a U.S. tax deal and optimism that Ireland would pass an austerity budget.
"There's a lot of focus on risks, and risks that have increased, and sovereign debt is mentioned explicitly, and that seems to be the trump card right now keeping the Bank of Canada from actually playing in the tightening game," said Eric Lascelles, chief Canada macro strategist at TD Securities.
But RBC's Watt noted the currency was still underperforming its commodity-linked peers, such as the Australian dollar, going into the announcement, and lagging alongside safe-haven currencies such as the yen or Swiss franc.
"In the past, we've sort of indicated the Canadian dollar looks very much like a safe haven in a good way and today it looks like a safe haven in a bad way," he said.
Watt noted the Canadian dollar was still trading in a fairly tight range, with significant U.S. dollar support eyed around a November low of C$0.9977 and resistance at the 50-day moving average of C$1.0150.
Canadian bond prices were also down, tracking U.S. Treasuries in a steep selloff as investors bailed out of safe-haven government debt in favor of stocks and other riskier assets. [US/]
However, Canadian bonds outperformed their U.S. counterparts across most of the curve with the dovish Bank of Canada statement capping the losses.
The two-year bond CA2YT=RR was down 13 Canadian cents to yield 1.629 percent, while the 10-year bond CA10YT=RR fell C$1.05 to yield 3.253 percent.