TORONTO: The Canadian dollar weakened against its US counterpart on Tuesday, with the currency pulling back from an earlier 2-1/2-year high as attention turned to a Bank of Canada policy decision on Wednesday.

The central bank is expected to keep its benchmark interest rate on hold at a record low of 0.25% but could comment on the recent strength of the loonie.

"They might talk it down a little bit, most likely through saying something that they will remain dovish for some time," said Colin Cieszynski, chief market strategist at SIA Wealth Management.

"Now that we have got new lockdowns coming in some provinces ... they might say we're not going to cut any more of our asset purchases in the near term."

In October, the central bank reduced its bond-buying program to C$4 billion per week from C$5 billion.

The Canadian dollar weakened 0.2% to 1.2817 to the greenback, or 78.02 US cents.

Earlier in the day, the currency touched its strongest intraday level since May 2018 at 1.2767. It has been supported by optimism that the rollout of COVID-19 vaccines will lift global economic growth in 2021.

A stronger currency could reduce demand for Canada's exports. One of Canada's major exports is oil, which lost ground on Tuesday as California tightened its pandemic lockdown through Christmas and COVID-19 cases surged in the United States and Europe.

US crude oil futures settled 0.4% lower at $45.60 a barrel, while the US dollar gained ground against a basket of major currencies, taking a breather from a sell-off that took it to its lowest level in more than 2-1/2 years last week.

Canadian government bond yields were lower across a flatter curve, with the 10-year down 2.8 basis points at 0.739%. On Monday, it touched a three-week high intraday at 0.810%.