* Touches highest level since Mar 19 at C$0.9865 * BoC holds rate at 1 pct, raises outlook * Bond prices drop, underperform Treasuries By Jon Cook TORONTO, April 17 (Reuters) - The Canadian dollar touched a near one-month high against its U.S. counterpart on Tuesday after the Bank of Canada said it may need to start hiking rates due to firmer-than-expected growth and inflation as well as a less hostile global backdrop. The central bank left its key interest rate at 1 percent as expected at its scheduled monetary policy announcement. But it forecast Canada's economy will return to its full capacity - the speed limit at which it can grow without generating excessive inflation - in the first half of 2013, at least a quarter earlier than it previously predicted. Analysts said the bank's tone in Tuesday's statement was more hawkish than expected and seemed to signal rate hikes sooner than previously predicted. The prospect of higher interest rates tends to help currencies strengthen by attracting global capital flows. The Canadian currency firmed to a near one-month high at C$0.9865 versus the U.S. dollar, or $1.0137, after the release of the bank statement. It was at C$0.9958 immediately before the release. "Pretty much most of the content is positive for the Canadian dollar," said Camilla Sutton, chief currency strategist at Scotia Capital. "Higher growth, firmer inflation, headwinds abating, the biggest domestic risk household debt, the shift higher in growth profile are all supportive of a stronger CAD and a significant hawkish turn from the Bank of Canada." At 10:59 a.m. (1459 GMT), the Canadian dollar was at C$0.9875 against the U.S. dollar, or $1.0127, up more than a cent from Monday's North American close at C$0.9997 versus the greenback, or $1.0003. It was on track for its largest single-day gain this year. Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that after the rate statement traders priced in higher odds of a rate hike later this year. "The market is certainly playing (a rate increase) towards the end of this year," said Mazen Issa, macro strategist at TD Securities. "The direction for the overnight rate is going to be up and they've certainly made that the case here." Canadian government bond prices fell after the bank's more positive economic outlook. The yield on the two-year bond, which is especially sensitive to Bank of Canada interest rate moves, rose to 1.376 percent from 1.26 percent just before the release. The benchmark 10-year bond fell 81 Canadian cents to yield 2.107 percent. Canadian government bond prices underperformed U.S. Treasuries after the news, especially at the short end of the yield curve.