TORONTO: The Canadian dollar weakened against its US counterpart on Tuesday as oil prices fell and data showed a surprise contraction of Canada's economy in the second quarter, with the currency giving back earlier gains.

Canada's economy unexpectedly shrank 1.1% in the second quarter on an annualized basis and most likely contracted 0.4% in July following a 0.7% gain in June, Statistics Canada data indicated. Analysts had expected second-quarter annualized growth of 2.5%.

The data led to "a minor bid in USD-CAD but the limited market reaction was telling," said Simon Harvey, FX market analyst for Monex Europe and Monex Canada.

"Data pertaining to household spending increased despite the tight provincial measures for much of Q2, while robust labour market conditions have further improved households' liquid deposits, which should support consumption in future quarters."

Canadian dollar notches 2-week high as Fed taper fears ebb

The price of oil, one of Canada's major exports, slipped as OPEC and its allies geared up for a meeting on Wednesday amid calls from the United States to pump more crude.

US crude prices fell 1% to $68.49 a barrel, while the Canadian dollar was trading 0.2% lower at 1.2620 to the greenback, or 79.24 US cents. The currency traded in a range of 1.2569 to 1.2628.

Investors awaited US jobs figures later this week for clues on the timing of the Federal Reserve's stimulus taper. The Bank of Canada is due to make an interest rate decision next week.

Canada's two-year yield eased two basis points to 0.408%, while the 10-year rate was little changed at 1.181%.