* C$ at C$0.9927, or $1.0074
* Bank of Canada holds rate steady at 1 percent
* Short-term yields fall after Bank of Canada statement (Updates with details, comments)
By Solarina Ho
TORONTO, Jan 18 (Reuters) - Canada's dollar extended losses against the greenback on Tuesday after the cental bank used more dovish-than-expected language in its much anticipated decision to keep interest rates steady at 1 percent.
The Bank of Canada held its overnight lending target steady for the third straight time after raising rates three times between June and September 2010. [ID:nN18290983]
At the same time it toughened its language on the harmful effects of the strong Canadian dollar on the recovery, noting the currency helped drive the country's current account deficit to a 20-year high.
A strong currency can act as a brake on growth in an export-oriented country such as Canada.
"The biggest driver today was the Bank of Canada statement and the fact that it was less hawkish than a lot of people were expecting," said Jacqui Douglas, currency strategist at TD Securities.
"If you look at CAD on the crosses, even, it's underperforming all the major currencies today, so this really does seem to be a Canada-specific issue."
At 12:26 p.m. (1726 GMT), the Canadian dollar CAD=D4 was at C$0.9927 to the U.S. dollar, or $1.0074. The currency was at C$0.9867, or $1.0135, just before the central bank's decision.
Overnight, it hit a 2-1/2 year high of C$0.9837 against the U.S. dollar, with some traders betting on more hawkish language in the statement.
"It seems like markets may be getting a little uncomfortable with how low USD/CAD has been heading and may want to rethink that value for the Canadian dollar now that the Bank of Canada looks like it's on hold for a while still," said Douglas.
The Bank of Canada nudged up economic growth forecasts for 2011 and 2012 to reflect the strength of the global economic recovery, but said that further reductions in its monetary policy stimulus would need to be carefully considered.
"I would think it would push off some of the bets in the market that the Bank of Canada is going to hike (rates) sooner rather than later, so I would expect a bit of the tone in the market to ease up on the Canadian dollar," said Derek Holt, an economist at Scotia Capital.
Overnight index swaps, which trade based on expectations for the key central bank rate, showed investors see an 83.23 percent probability rates will stay on hold March 1, compared with 72.85 percent before the statement. BOCWATCH
SHORT-TERM YIELDS FALL
Canadian government T-bill and bond yields fell immediately after the rate announcement, reflecting a scaling back of rate hike expectations.
But bond yields later reversed those declines, mirroring weakness in U.S. Treasury prices. Traders said a large sale of long-dated U.S. bonds pushed the market into the red and sparked a broader wave of selling. [US/]
The yield on the rate-sensitive two-year Canadian government bond CA2YT=RR was 1.793 percent, little changed from before the statement. The 10-year bond was down 35 Canadian cents to yield 3.30 percent. <0#CABMK=> (Editing by Jeffrey Hodgson)