* C$ at C$1.0463 to the U.S. dollar
* Bank of Canada holds rates, reiterates concern about C$
* Bond prices up across the curve, outperform U.S.
(Recasts, adds details, quote)
By Jennifer Kwan
TORONTO, Oct 20 (Reuters) - Canada's dollar fell by more than a cent against the greenback on Tuesday after the Bank of Canada held rates steady and warned the strong Canadian dollar would "more than fully offset" favorable developments since July.
As well, far from giving any suggestion of an early exit from its extended low-rate strategy, it projected a three-month delay -- to the third quarter of 2011 -- in the closing of the output gap and the return of inflation to its 2 percent target. [ID:nN19231469]
"They've strengthened their rhetoric on the pace of appreciation in CAD, but left their expectations for monetary policy on hold until Q2 2010," said Camilla Sutton, currency strategist, Scotia Capital.
"This creates a knee-jerk dollar-Canada move higher, but then the strength in the Canadian dollar will be able to resume once we get through the knee-jerk part."
At 10:35 a.m. (1435 GMT), the Canadian unit was at C$1.0463 to the U.S. dollar, or 95.57 U.S. cents, down from C$1.0293 to the U.S. dollar, or 97.15 U.S. cents, at Monday's close.
The currency was trading at around C$1.0320, or 96.90 U.S. cents just before the announcement.
The Canadian dollar has rallied as much as 28 percent off the four-year low it tumbled to in March, hitting C$1.0207 to the U.S. dollar, or 97.97 U.S. cents, last week.
Also weighing on the domestic currency was a drop in the price of oil, a key Canadian export, to below $80 a barrel, while gold prices were also lower. [O/R] [GOL/]
BOND PRICES HIGHER
Domestic bond prices rose across the curve, boosted by the central bank's statement and prospect it will keep interest rates lower for longer.
"Their expression in the strength in the currency, the notion that they've extended the period of time that the output gap will be closed by a quarter, they revised down their growth outlook for 2011. Those factors are giving us a bit of a push here," said Mark Chandler, fixed income strategist at RBC Capital Markets.
The two-year bond CA2YT=RR climbed 21 Canadian cents to C$99.43 to yield 1.526 percent, while the 30-year bond CA30YT=RR shot 75 Canadian cents higher to C$117.95 to yield 3.928 percent. The two-year bond yielded 1.618 percent before the Bank of Canada statement.
Canadian bonds mostly outperformed U.S. Treasuries, which extended gains on weaker-than-expected U.S. economic data. [US/]
The yield on the two-year Canadian government bond was 59 basis points above its U.S. counterpart, down from 66 basis points at the close of trading on Monday. (Reporting by Jennifer Kwan; Editing by Jeffrey Hodgson)