The Canadian dollar edged higher against its U.S. counterpart on Tuesday as the greenback dipped broadly ahead of U.S. President Donald Trump's State of the Union address and an interest rate decision by the Federal Reserve.

At 4 p.m. ET, the Canadian dollar was trading 0.1 per cent higher at $1.2329 to the greenback, or 81.11 U.S. cents.

The currency traded in a range of $1.2310 to $1.2378. Last week, the loonie touched its strongest level in more than four months at $1.2283.

Attention on Trump's speech on Tuesday night was mostly on his views on an infrastructure overhaul and trade, with the future of the North American Free Trade Agreement hanging in the balance.

"It does appear that the president has become a little bit more aware of what pulling out of NAFTA might mean for the U.S. economy and perhaps even the U.S. equity market, which he pays close attention to," said Shaun Osborne, chief currency strategist at Scotiabank.

Trump's trade chief rejected Canadian proposals for unblocking NAFTA modernization talks on Monday but pledged to seek "breakthroughs" by late February, easing concerns that Washington would soon withdraw from the trilateral pact.

Fed Chair Janet Yellen was expected to keep the central bank on course for more interest rate rises at her final meeting in charge. The rate decision is due on Wednesday.

World stocks retreated for a second straight day and the price of oil, one of Canada's major exports, also fell, as nerves about rising global borrowing costs cooled financial markets' euphoric start to the year.

U.S. crude prices settled 1.6 per cent lower at US$64.50 a barrel.

After six straight weekly declines, the U.S. dollar index was on track to fall about 3.2 per cent for the month, which would be its biggest monthly fall since March 2016.

Canadian government bond prices were lower across a steeper yield curve, with the two-year down 1 cent to yield 1.831 per cent and the 10-year falling 13 cents to yield 2.297 per cent.

On Monday, the 10-year yield touched its highest intraday level since September 2014 at 2.314 per cent.

Canadian gross domestic product data for November is due on Wednesday. The economy is forecast to have grown by 0.4 per cent, a Reuters poll shows, regaining momentum after pausing in October.