* Canadian dollar at C$1.0703 or 93.43 U.S. cents * Loonie trades at lowest level since 2010 in overnight session * Bond prices lower across the maturity curve By Leah Schnurr TORONTO, Dec 19 (Reuters) - The Canadian dollar touched a new 3-1/2-year low against the greenback on Thursday as investors dumped the currency in the wake of the U.S. Federal Reserve's decision to start scaling back its massive economic stimulus program. The Fed on Wednesday announced it will modestly trim the amount of its quantitative easing, known as "QE", which has been a significant driver of global markets across assets this year. Still, the Fed tried to temper reaction to the move by suggesting its key interest rate would stay low for even longer than previously promised. The reduction in Fed bond-buying is seen as a negative for the Canadian dollar because it is expected to direct capital flows to the U.S. currency on the expectation of higher returns. The Canadian dollar has also been hit by a recent more dovish shift from the Bank of Canada, which has analysts expecting that interest rates at home will stay low for longer. "The bearish sentiment on the loonie is pretty prevalent, so we wouldn't be surprised to see continuing weakness," said Benjamin Reitzes, senior economist at BMO Capital Markets in Toronto. The Canadian dollar was at C$1.0703 to the greenback, or 93.43 U.S. cents, weaker than Wednesday's close of C$1.0689, or 93.55 U.S. cents. The loonie traded as far as C$1.0728 in the overnight session, its lowest level since May 2010. Analysts expect there to be technical support around the C$1.07 level. Some investors took the Fed's move as a sign the U.S. economic recovery is finally strong enough for the central bank to start withdrawing. A stronger economy south of the border should ultimately benefit Canada, which relies on the United States for trade. Even so, expectations that the Bank of Canada will remain on the sidelines, as well as the ongoing pullback of the Fed's stimulus, will likely continue to weigh on the Canadian dollar, said Reitzes. "The (economic) numbers for October in Canada have been pretty good so far, we could get a pretty decent October GDP report that could provide a little bit of support next week in thin markets," said Reitzes. "But going forward, as the Fed still dominates markets and market psychology, it's going to be difficult for the Canadian dollar to really gain any meaningful traction." Canadian government bond prices were lower across the maturity curve, with the two-year down 7 Canadian cents to yield 1.139 percent and the benchmark 10-year down 24 Canadian cents to yield 2.710 percent.