OTTAWA (Reuters) - The Bank of Canada raised its key overnight interest rate by one quarter of a percentage point to 3.75 percent as expected on Tuesday, but signaled that its current tightening cycle may be drawing to a close.

It also noted that the Canadian dollar, which rallied to fresh 14-year highs last week, has risen more than the bank had assumed in its January economic assessment.

The central bank changed its language to suggest future rate hikes would not be automatic, using the phrase "may be required" instead of the words "would be required" that it had used in January and February.

Recent data do not alter the bank's outlook for growth and inflation and its assessment of risks, it said.

"Consistent with this view, some modest further increase in the policy interest rate may be required to keep aggregate supply and demand in balance and inflation on target over the medium term," the bank said in its statement.

The Canadian dollar quickly fell, retreating to C$1.1472 to the U.S. dollar, or 87.17 U.S. cents, from C$1.1425, or 87.53 U.S. cents, just before the announcement. Rising interest rates make Canadian securities more attractive to investors, who are constantly on the prowl for high-yielding assets.

"It basically leaves the door open to just about anything the Bank of Canada wants to do -- either hike or not hike next time around," TD Securities chief strategist Marc Levesque said in Toronto. "It's really going to depend on the data, and where the currency is headed."

The bank drew attention to the fact that while the Canadian and global economies had been broadly in line with its expectations, the Canadian dollar moved above the range that had been assumed in its January 26 Monetary Policy Report Update.

The bank does not target a specific dollar rate but has said that if exchange rate moves do not reflect fundamentals it might have to offset them. Tuesday's announcement did not pronounce on whether some of the current strength in the dollar was driven by speculation.

Ron Simpson, managing director of global currency analysis at Action Economics in New York, said the market was long on Canadian dollars and could test the C$1.1510 level.

"And we'll have to see what happens with oil. I think the risks for oil prices are to the downside," he said. The Canadian dollar benefits from higher energy prices since they boost the value of the country's exports.

Economists characterized the bank's language more as neutral than dovish, however.

"This time around they are leaving the door open to move to the sidelines. However, there is nothing in this press release that suggests they are already in a pause mode at this point," said Stefane Marion, assistant chief economist at National Bank Financial in Montreal.

"Obviously, the bank will be a lot more data-dependent."

The bank said fourth quarter growth of 2.5 percent, as well as overall and core inflation, had come in as expected.

"Overall, indications are that the Canadian economy is continuing to operate at its full production capacity," it said.

The rate move marked the bank's fifth increase in a row. A Reuters survey of economists before Tuesday's announcement found most dealers expecting a further hike at the next rate-setting date, April 25.

Most market players do not expect the Canadian rate to overtake the comparable U.S. fed funds rate, which currently stands at 4.5 percent and may see only a modest further increase.