* C$ weakens to C$0.9966, or $1.0034, lowest since Jan. 14
* BoC warns in MPR strong C$ will temper growth
* Canadian factory sales weaker than expected (Updates with details, comments)
TORONTO, Jan 19 (Reuters) - Canada's dollar weakened to its lowest point in almost a week against its U.S. counterpart on Wednesday after the Bank of Canada warned in a key report that the strong domestic currency would temper growth.
The central bank said in its quarterly Monetary Policy Report that growth will pick up speed this year after a sharp slowdown in the third quarter of 2010, but a strong Canadian dollar will mute a much-needed recovery in exports. [ID:nN19255456]
And Bank of Canada Governor Mark Carney said Canada has become less competitive because of poor relative productivity performance.
"Canada hasn't seen productivity gains you would have liked to have seen. So in this case, it means that you'll have sections of the economy ... that are now less competitive than before," said Sacha Tihanyi, a currency strategist at Scotia Capital.
"Instead of currency strength coming from productivity gains, it happens in the absence ... which can put some stress on the economy."
That stress to the economy is seen making it less likely that that central bank will rush to resume the rate hike campaign it started last year.
The Canadian dollar fell from a 2 1/2-year high on Tuesday after the bank kept its key policy rate steady at 1 percent and used unexpectedly dovish language in its policy statement. [ID:nN18290983]
"This report just substantiates the message of the press statement that the bank will probably not raise rates in March, maybe not for a few more months," said Sal Guatieri, a senior economist at BMO Capital Markets.
Most of Canada's primary dealers polled on Tuesday expect another rate increase in the first half of this year, although they differ on the timing. [CA/POLL]
FACTORY SALES SLIP
The currencyfinished the day at C$0.9955 to the U.S. dollar, or $1.0045, compared with C$0.9929 to the U.S. dollar on Tuesday. It hit a session low of C$0.9966 to the U.S. dollar, or $1.0034, after the report.
"No real CAD-supportive remarks came out of the MPR," said Tihanyi.
Weaker-than-expected Canadian manufacturing data on Wednesday added to concerns about Canada's fourth-quarter gross domestic product report and weighed on the Canadian dollar. [ID:nN19215598]
"That suggests the economy was fairly flat in November and probably had a few analysts revising down their fourth quarter growth estimates," said Guatieri.
Economic data south of the border also weighed on the currency, with U.S. housing starts falling to the lowest rate in over a year, suggesting the battered U.S. housing sector continued to be a roadblock in the country's recovery. The United States is Canada's largest export market.
U.S. crude prices, which eased for a second day on worries about the U.S. recovery, also weighed on the currency as Canada is a major energy exporter. [O/R]
Canadian government bond prices were firmer across the curve, helped by the view a strong currency could delay Bank of Canada rate increases. Both Canadian and U.S. government bonds also benefited from safe-have demand triggered by a decline in stock markets. [US/]
The interest rate-sensitive two-year bondwas up 14 Canadian cents to yield 1.692 percent, while the 10-year bond added 27 Canadian cents to yield 3.241 percent. (Additional reporting by Ka Yan Ng; editing by Jeffrey Hodgson)
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