* C$ falls to $1.0356 after Bank of Canada policy report
* Bank repeats concern about C$'s "persistent strength"
* Bond prices head higher as stock rally loses steam (Updates with details)
By Ka Yan Ng
TORONTO, April 13 (Reuters) - The Canadian dollar turned lower against the U.S. dollar on Wednesday, spurred by more warnings from the Bank of Canada that the strength of the currency will dampen economic growth.
In a news conference following release of the bank's quarterly Monetary Policy Report (MPR), bank Governor Mark Carney was asked whether the sharp appreciation of the Canadian dollar was effectively tightening monetary conditions, allowing the bank to delay rate hikes.
He flagged it as an "additional risk" to the outlook for growth and inflation, reinforcing the Bank of Canada's strong language on the Canadian dollar's "persistent strength" after the bank left interest rates steady at 1 percent, as expected, on Tuesday. [ID:nN12159489] [ID:nN13293182]
A strong Canadian dollar is a concern because it hampers export growth in an export-oriented economy.
The Canadian dollar CAD=D4 retreated as low as C$0.9656 to the U.S. dollar, or $1.0356. By 1:20 p.m. (1720 GMT), it was at C$0.9643 to the U.S. dollar, or $1.0370, slightly weaker than Tuesday's North American finish. The Canadian dollar closed at its lowest level in a week on Tuesday as oil prices fell and the central bank warned about the impact of the currency's continued strength.
"You're seeing a certain consolidation in the currency after yesterday's selloff," said David Tulk, chief Canada macro strategist at TD Securities.
The detailed forecasts revealed in the MPR supported the view that the bank is not about to lift borrowing costs in May. Overnight index swaps, which trade based on expectations for the key central bank rate, show a slim 7.37 percent chance of a rate hike on May 31, the bank's next policy-setting date.
A September rate hike remains fully priced in by the market with a 25 basis point rise seen, although bets on that were also trimmed following the MPR. BOCWATCH
In a Reuters poll of economists and strategists released last week, however, the median forecast was for the bank to make the first interest rate hike of the year on July 19. [CA/POLL]
Also hurting the Canadian dollar on Wednesday, oil prices turned lower after an early rise and stock markets were off morning highs.
The flight from riskier assets pushed Canadian government bonds higher, resuming an upward march on lowered expectations of a near-term Canadian interest rate hike.
The two-year bond CA2YT=RR, which is especially sensitive to Bank of Canada policy moves, was was up 8 Canadian cents to yield 1.814 percent, while the 10-year bond CA10YT=RR gained 28 Canadian cents to yield 3.382 percent. (Reporting by Ka Yan Ng; editing by Peter Galloway)