C$ steadies after 4-year low, focus on central bank

By Leah Schnurr

TORONTO (Reuters) - The Canadian dollar was little changed against the greenback on Wednesday after hitting another four-year low in overnight trade as investors were wary the Bank of Canada could turn more dovish at its upcoming policy meeting.

The loonie has been on a downward trend since late October when the central bank abandoned any talk of rate hikes in its policy statement after 18 months of signaling that tightening was on the horizon.

The selloff has intensified in recent sessions, fueled by disappointing economic data last week that helped send the currency through key technical barriers. In the first two weeks of 2014, the U.S. dollar has appreciated 3 percent against the Canadian currency.

Some profit-taking offset Wednesday's earlier decline, but attention was turning toward next week's meeting of the Bank of Canada. Market expectations are building that the central bank could further soften its policy statement and perhaps step toward an outright easing bias, said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

"I think myself it's a little too early to expect that; I think the Bank's going to want to see more evidence on the inflation front before it takes that move," said Osborne.

"But given the way Governor Poloz seems to be steering the policy supertanker at the moment, there's very definitely a risk of a shift at some point in the next few months."

Bank of Canada chief Stephen Poloz earlier this month said the central bank should keep its key interest rate on hold until economic data persuades it otherwise.

The Canadian dollar ended the North American session at C$1.0945 to the greenback, or 91.37 U.S. cents, slightly firmer than Tuesday's close of C$1.0948, or 91.34 U.S. cents. The Canadian dollar earlier traded as low as C$1.0992, its lowest since September 2009.

"The path of least resistance is still downward," said Tony Valente, senior FX dealer for global treasury solutions for AscendantFX in Toronto. Valente said the loonie could trade in the C$1.15 area by June before improving in the latter part of 2014.

"I'm not as pessimistic as others; I think in the second half of the year the (Canadian) dollar should do better only because the prescription for the economy is a weaker dollar at this point. Six months of weakness will probably help the exporters in the second half of the year."

Strength in the U.S. dollar also pressured the loonie after data was released showing U.S. producer prices rose in December, while separate data showed manufacturing activity in New York state jumped this month. The U.S. dollar index (.DXY) was up 0.4 percent.

Canadian government bond prices were mixed across the maturity curve, with the two-year off 1 Canadian cent to yield 1.061 percent, while the benchmark 10-year was up 2 Canadian cents to yield 2.582 percent.

(Editing by James Dalgleish)