TORONTO: The Canadian dollar strengthened against its US counterpart on Tuesday as a decline in bond yields bolstered risk appetite, while investors awaited an interest rate decision by the Bank of Canada on Wednesday.

The Canadian dollar was trading 0.2% higher at 1.2639 to the greenback, or 79.12 US cents, having traded in a range of 1.2590 to 1.2685.

"We saw US yields retreat a little bit overnight, so that's caused a bit more market confidence which helps the commodity currencies," said Darren Richardson, chief operating officer at Richardson International Currency Exchange Inc.

The safe-haven US dollar fell back from 3-1/2-month highs and global shares climbed as the drop in yields eased concerns the economic recovery could overheat and lead to stronger-than-expected inflation.

Canada runs a current account deficit and is a major exporter of commodities, including oil, so the loonie tends to be sensitive to risk appetite.

US crude oil futures gave back some recent gains, settling 1.6% lower at $64.01 a barrel. On Monday, oil touched its highest level since October 2018, bolstered by tighter supply due to extended OPEC+ output curbs and growing hopes of a recovery in demand.

The rally in oil has been supportive of the Canadian dollar. Since the start of the year, the loonie has gained 0.7%, trailing just sterling and the Norwegian crown among G10 currencies.

Investors see rising chances that the Bank of Canada would hike interest rates next year as the economic outlook improves, but the central bank is likely to push back against those bets for now, pointing to still-high unemployment, analysts say.

Canadian government bond yields fell across a flatter curve in sympathy with US Treasuries, with the 10-year down 6.3 basis points at 1.461%. On Monday, it touched its highest since January 2020 at 1.545%.