* BoC: C$ dampening economy, a factor in assessing policy
* C$ sags to 97.29 U.S. cents
* Bonds shoot higher (Adds details)
By Ka Yan Ng
TORONTO, June 22 (Reuters) - The Canadian dollar dropped hard against the U.S. currency on Tuesday after the Bank of Canada said the currency's drag on the Canadian recovery could be a key issue in future monetary policy.
Bank of Canada Deputy Governor Timothy Lane said the currency would be a factor in assessing the economy and monetary policy, sending the currency to a session low at C$1.0296 to the U.S. dollar, or 97.13 U.S. cents. [ID:nTOR007606]
His comments, coupled with earlier data that showed domestic inflation was not a threat, put a brake on near-term rate hike expectations. [ID:nN22110502]
"It's casting a bit of doubt as to what the bank is going to do at the next meeting," said John Curran, senior vice president at CanadianForex, a commercial dealing firm.
"But I still think if we continue to get decent numbers out of Canada they'll hike rates again."
Markets have priced in a nearly 80 percent probability, slightly lower than the previous session, that the Bank of Canada will raise interest rates at its next policy setting announcement on July 20. The bank raised its key rate this month by a quarter-point to 0.5 percent. BOCWATCH
At 3:05 p.m. (1905 GMT), the Canadian dollar was at C$1.0279 to the U.S. dollar, or 97.29 U.S. cents, down from Monday's close at C$1.0244 to the U.S. dollar, or 97.62 U.S. cents.
The currency's weakness was exacerbated by the rapidly declining price of oil and equity markets, which fell in part because of a surprise drop in U.S. existing home sales in May as well as a ratings downgrade of French bank BNP Paribas. [ID:nN22382886] [MKTS/GLOB]
Canadian government bond prices shot higher on a rethink of the path of interest rates.
The two-year government bond CA2YT=RR jumped 9 Canadian cents to yield 1.692 percent, while the 10-year bond CA10YT=RR rose 59 Canadian cents to yield 3.258 percent.
(Additional reporting by Rod Nickel in Winnipeg; Editing by Mario Di Simine)