TORONTO: The Canadian dollar strengthened against its US counterpart on Tuesday as investors and corporations that routinely buy the currency scrambled to reduce some risk ahead of a Federal Reserve interest rate decision.

The loonie was trading 0.3% higher at 1.2436 to the greenback, or 80.41 US cents, having touched its strongest since February 2018 at 1.2435.

It was the second best performance among G10 currencies, after the Swiss franc, despite a drop in the price of oil, one of Canada's major exports.

"What that shows is there's still people out there who were caught unawares by the suddenness of the CAD rally and are probably struggling to cover their exposures," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.

Investors may be trying to square up their position ahead of the Fed, "otherwise they might spend the rest of the week squaring up," Anderson said.

The loonie was boosted on Friday by data showing that Canada added many more jobs than expected in February.

Fed policymakers are expected on Wednesday to forecast that the US economy will grow in 2021 at the fastest rate in decades.

US crude oil futures settled 0.9% lower at $64.80 a barrel as a recovery in demand was threatened by moves by some European countries to suspend the use of a major COVID-19 vaccine made by AstraZeneca Plc.

Canada's inflation report for February is due on Wednesday, which could help guide expectations for the Bank of Canada policy outlook.

The central bank is likely to reduce its bond purchases as soon as April, strategists say, which would provide the clearest signal yet that Canada's economy requires less help to emerge from the coronavirus crisis.

Canada's 10-year yield was up 2.2 basis points at 1.565%. On Monday, it touched a 14-month high intraday at1.602%.