* C$0.9965 vs US$, or $1.0035
* Canada CPI stronger than expected
* Focus on FOMC outcome at 1415/1815 GMT
* Bond prices lower, Canada underperforms
By Andrea Hopkins
TORONTO, Sept 21 (Reuters) - The Canadian dollar weakened in early trade on Wednesday, shrugging of higher-than-expected inflation data as global markets awaited the Federal Reserve's closely-watched policy meeting.
World stocks drifted lower and the euro also slipped ahead of the outcome of the Federal Open Market Committee meeting, with concerns about a possible Greek default weighing on investor sentiment.
Persistent concerns about Greek sovereign debt limited any excitement ahead of the Fed, with Greece and international lenders yet to reach a deal to allow Athens more funds despite some progress. [MKTS/GLOB]
The Canadian dollar briefly pared losses against its U.S. counterpart after Canadian consumer price data came in stronger than expected, but the currency then weakened back to pre-data levels, below Tuesday's session close.
At 8:11 a.m. (1211 GMT), the Canadian dollar CAD=D4 stood at C$0.9965 to the U.S. dollar, or $1.0035 U.S. cents, below Tuesday's North American session close of C$0.9936 to the U.S. dollar, or $1.0064 U.S. cents. It touched that closing level immediately after the inflation data.
"We got a little bit of a bounce after a slightly strong CPI data, but really I think the market has got two things on its mind. Number one, comments from Governor Carney that were a little more dovish, and more importantly, the FOMC later today," said Steve Butler, director of foreign exchange trading at Scotia Capital.
"If you look back it seems Bernanke and company have been a little more dovish and a little more aggressive in terms of trying to create some sort of solution for all the problems. I think that's what the market is really waiting for today."
The Fed looks set to launch a fresh effort to invigorate the faltering U.S. economic recovery, embarking on what could be the first in a series of incremental steps to foster stronger growth. Analysts believe the central bank is likely to try to push long-term borrowing costs lower by rebalancing its $2.8 trillion portfolio of bond holdings to weight it more heavily to longer-term securities. [ID:nS1E78J25W]
Members of the Fed's policy-setting committee are expected to announce their decision at about 2:15 p.m. (1815 GMT) at the conclusion of a two-day meeting.
In Canada, the annual inflation rate increased to a higher-than-expected 3.1 percent in August, but analysts said this was unlikely to worry the Bank of Canada, which is more concerned about problems in Europe and the United States.
Market operators had expected the annual rate to rise to 2.9 percent from the 2.7 percent recorded in July. [ID:nS1E78K04J]
Analysts noted the currency briefly strengthened as the inflation report cooled some market speculation that the Bank of Canada will cut interest rates.
Overnight index swaps, which trade based on expectations for the central bank's main policy rate, showed that after the data traders priced in lower odds of a rate cut this year or next. BOCWATCH
Butler said the Canadian dollar should get support around the C$0.9975 to C$0.9980 level, and meet resistance at C$0.9880 to C$0.9890 to the U.S. dollar.
"I would expect that the market in general would be looking for moderate downbeat risk sentiment today and with that a stronger (U.S.) dollar," Butler said.
Bond prices were lower across the curve and underperformed U.S. Treasuries.
The two-year bond CA2YT=RR was down 4 Canadian cents to yield 0.960 percent, while the 10-year bond CA10YT=RR was down 18 Canadian cents to yield 2.218 percent. (Editing by Jeffrey Hodgson)