* C$ weakens to C$0.9964, or $1.0036, lowest since Jan. 14
* BoC warns in MPR strong C$ will temper growth
* Canadian factory sales weaker than expected
TORONTO, Jan 19 (Reuters) - The Canadian dollar hit a session low against its U.S. counterpart on Wednesday after the Bank of Canada warned in a key report that the high level of the domestic currency would temper growth.
The central bank said in its quarterly Monetary Policy Report that Canadian growth will pick up speed this year after a sharp slowdown in the third quarter of 2010, but a strong Canadian dollar will mute the much-needed recovery in exports. [ID:nN19255456]
The Canadian dollar already fell from a 2 1/2-year high on Tuesday after the bank kept its key policy rate steady at 1 percent and used unexpectedly dovish language in its policy statement. [ID:nN18290983]
"This report just substantiates the message of the press statement that the bank will probably not raise rates in March, maybe not for a few more months," said Sal Guatieri, a senior economist at BMO Capital Markets.
Most of Canada's primary dealers polled on Tuesday expect another rate increase in the first half of this year, although they differ on the timing. [CA/POLL]
At 12:53 p.m. (1753 GMT), the currencystood at C$0.9955 to the U.S. dollar, or $1.0045. The currency, already weaker heading into the bank's report, fell as low as C$0.9964 to the U.S. dollar, or $1.0036. It had closed at C$0.9929 to the U.S. dollar on Tuesday.
Weaker-than-expected Canadian manufacturing data on Wednesday also added to concerns about Canada's fourth-quarter gross domestic product report and weighed on the Canadian dollar. [ID:nN19215598]
"That suggests the economy was fairly flat in November and probably had a few analysts revising down their fourth quarter growth estimates," said Guatieri.
Canadian government bond prices were firmer across the curve, helped by the view a strong currency could push back Bank of Canada rate increases. Both Canadian and U.S. government bonds also benefited from safe-have demand triggered by a decline in stock markets. [US/]
The interest rate-sensitive two-year bondwas up 9.7 Canadian cents to yield 1.716 percent, while the 10-year bond added 30 Canadian cents to yield 3.238 percent. (Editing by Jeffrey Hodgson)
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