CANADA FX DEBT-C$ bounces from 3-1/2-year low but outlook still weak

* Canadian dollar at C$1.0648 or 93.91 U.S. cents * Inflation 0.9 pct in November, core 1.1 pct * Bond prices up across the maturity curve By Leah Schnurr TORONTO, Dec 20 (Reuters) - The Canadian dollar strengthened modestly against the greenback on Friday, recovering from a 3-1/2-year low as investors booked profits, though the broader trend of a weaker loonie was expected to continue into the new year.

The currency started the day on a weak footing, dropping after data showed Canada's annual inflation rate edged up in November but remained below the Bank of Canada's target range.

As well, core inflation, which strips out volatile items and is watched by the central bank, slipped on the month. The report reinforced analysts expectations that rates will stay low for some time.

The figures sent the Canadian dollar to its lowest level since May 2010 but the loonie was able to claw its way higher into the close of the North American session.

"The CPI disappointed and that's how we got to the weak levels that we saw early this morning. Since then, a lot of people apparently were looking to buy the Canadian dollar on the dips," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.

Stronger oil prices, as well as some improved risk appetite, also gave the currency some support, said Anderson.

South of the border, the economy grew at its fastest pace in almost two years in the third quarter, taking some of the sting out of the Federal Reserve's decision this week to begin reducing its economic stimulus.

"The best of all worlds is that the economy is strong enough that the Fed can step out and that seems to be the news from the GDP," said Anderson.

The Canadian dollar ended the North American session at C$1.0648 to the greenback, or 93.91 U.S. cents, stronger than Thursday's close of C$1.0666, or 93.76 U.S. cents.

The currency traded as far as C$1.0737 in the morning, its lowest level since May 2010.

A more neutral policy shift from the Bank of Canada has weighed on the loonie in recent months as investors pushed their expectations for when interest rates will rise further out into the future. The currency has lost more than 3 percent since late October when the Bank of Canada dropped its tightening bias.

Friday's inflation report "helps fuel the growing narrative that the Bank of Canada is becoming increasingly more dovish," said Mazen Issa, macro strategist at TD Securities in Toronto.

"Certainly the risk that the bank adopts an explicit easing bias in January continues to grow and this report lends further credence to that view." Weakness for the loonie is expected to continue into 2014, said Anderson, who sees the currency trading as low as C$1.10 next year.

Canadian government bond prices were higher across the maturity curve, with the two-year up 6.2 Canadian cents to yield 1.107 percent and the benchmark 10-year up 26 Canadian cents to yield 2.672 percent.