* Canadian dollar at C$1.0972 or 91.14 U.S. cents * Bond prices mostly lower across maturity curve By Leah Schnurr TORONTO, Jan 21 The Canadian dollar fell to a four-year low against the greenback on Tuesday, breaking through the psychologically important C$1.10 level before clawing back some ground, as investors speculated about the path of monetary policy on both sides of the border. The loonie backed off the session's lows after data showed Canadian manufacturing sales rose more than expected in November to their highest in almost two years. The currency was hit overnight by a rise in the U.S. dollar on conjecture that the U.S. Federal Reserve might further scale back its economic stimulus program. The Wall Street Journal said that the Fed may trim its bond purchases to $65 billion a month from the current $75 billion when it meets at the end of January. A swifter pace of unwinding the Fed's quantitative easing program is seen as a negative for the Canadian dollar as it will likely boost investor appetite for the U.S. currency. At the same time, concerns that the Bank of Canada could sound more dovish when it announces its latest interest-rate decision on Wednesday drove the loonie lower. The Bank of Canada shifted gears late last year, dropping any talk of rate hikes after 18 months of signaling that policy tightening was on the horizon. The change has weighed heavily on the Canadian dollar, with the U.S. dollar appreciating more than 3 percent against the loonie just three weeks into 2014. The greenback has gained more than 6 percent against the Canadian currency since the Bank of Canada first signaled its policy shift last October. "The sentiment does continue to be quite firmly against Canada," said Don Mikolich, executive director of foreign exchange sales at CIBC World Markets in Toronto. After some disappointing economic data earlier this month, including a surprise increase in the unemployment rate, markets are positioning for the Bank of Canada to take a more dovish tone on Wednesday. "They've been comfortable to see the currency weaken off to a certain level," Mikolich said. "It's hard to say what levels they have in mind, ultimately, but I don't think we're there yet." The Canadian dollar ended the North American session at C$1.0972 to the greenback, or 91.14 U.S. cents, weaker than Monday's close of C$1.0951, or 91.32 U.S. cents. It fell as low as C$1.1019, its lowest level since September 2009. The Canadian dollar trimmed declines after data showed factory sales jumped 1 percent in November, though a separate report showed wholesale trade was flat in the same month. As well as a decision on interest rates, the Bank of Canada will release its Monetary Policy Report, providing a quarterly update of its economic forecasts. The central bank is widely expected to keep rates at 1 percent. With the large amount in short positions against the Canadian dollar, the U.S. dollar-Canadian dollar pairing could be in for a retracement if the Bank of Canada is not as dovish as the market expects, said Gareth Sylvester, director at Klarity FX in San Francisco. "Canadian dollar shorts are certainly getting to extreme levels. I think the market has priced in a particular dovish tone tomorrow, and in the absence of a more pessimistic outlook, the market may be setting itself up for a bit of a fall," Sylvester said. Canadian government bond prices were mostly lower across the maturity curve, with the two-year off 2 Canadian cents to yield 1.027 percent, and the benchmark 10-year down 12 Canadian cents to yield 2.507 percent.