* C$ higher at C$0.9872, or $1.0130
* Focus on tone of BoC statement, monetary policy
By Solarina Ho
TORONTO, Jan 17 (Reuters) - Canada's dollar drifted higher against the U.S. currency in quiet trading on Monday, with volumes low due to a U.S. holiday and many investors limiting bets ahead of the Bank of Canada's rate decision on Tuesday.
The central bank is widely expected to hold interest rates at 1 percent, with focus primarily on the tone of the accompanying statement. [CA/POLL] [ID:nN25118365]
Some analysts said the central bank may use more hawkish language to prepare the market for the resumption of interest rate hikes later this year. Higher rates tend to strengthen a currency by attracting capital flows.
"We expect a slightly more hawkish communique, but at the end of the day, we do continue to think the Bank will be on hold until July," said Ian Pollick, a portfolio strategist at TD Securities.
The currency CAD=D4 stood at C$0.9872 to the U.S. dollar, or $1.0130, firming from Friday's North American finish of C$0.9894 to the U.S. dollar, or $1.0107.
"A lot of that was driven by its performance during the overnight session where it did trade higher," said George Davis, chief technical strategist at RBC Capital Markets.
"We've generally tended to see the Canadian dollar outperform on the crosses, against the Australian dollar and the euro, for example. I think that set the tone for today."
Davis noted that trading was on light volumes, with the currency firming toward the C$0.9850 area earlier in the session and weakening toward the C$0.9875 level after the order flow worked its way through the market.
The U.S. markets were closed for the Martin Luther King holiday.
In addition to the focus on tone of the interest rate statement, the central bank's quarterly Monetary Policy Report due out on Wednesday will also be dissected.
"That will go along way to determine whether or not the gains we've seen in the Canadian dollar into the new year are going to be sustained, or whether we get a little bit of a price correction," said Davis.
Davis says the market will be keeping an eye on the C$0.9851 level -- near the 2011 high -- which could be broken if the Bank of Canada uses a hawkish tone. He said a more dovish tone could drive the currency toward C$0.9977.
Canadian bond prices were mostly higher on Monday, though the interest rate-sensitive two-year bond CA2YT=RR was unchanged, yielding 1.790 percent. The 10-year bond CA10YT=RR up 12 Canadian cents, yielding 3.257 percent. [US/]
"You really aren't seeing too much movement in any part of the curve, I think people are sitting with baited breath waiting for tomorrow," said Pollick. (Editing by Jeffrey Hodgson)