The Canadian dollar hit its strongest level since September against its U.S. counterpart on Tuesday as Bank of Canada Governor Stephen Poloz added more support to the view the central bank will raise interest rates as early as next week.

Inflation in Canada should be well into an uptrend by the first half of 2018, Poloz told German newspaper Handelsblatt, adding that policy normalization must begin before price growth hits its target.

"That was another chance that the bank didn't take to push back against the idea that they might be raising rates next week," said Bipan Rai, director of foreign exchange strategy at CIBC Capital Markets, who expects two hikes this year.

Top Bank of Canada officials' recent assertions that a pair of 2015 interest rate cuts did their job in cushioning the economy from collapsing oil prices appear to be paving the way for a tightening move as soon as July 12.

The discount at which Canadian two-year bonds trade versus U.S. Treasuries have also narrowed sharply since late June.

The two-year price fell 6.5 cents to yield 1.137 per cent and the 10-year declined 60 cents to yield 1.832 per cent on Tuesday.

The two-year yield is at its highest since October 2014.

Chances of a rate hike next week are nearly 65 per cent, data from the overnight index swaps market shows.

At 4 p.m. ET, the Canadian dollar was trading at $1.2930 to the greenback, or 77.34 cents US, up 0.6 per cent.

At one point the loonie touched $1.2912, its strongest since Sept. 9.

CIBC's Rai said the currency could strengthen further in the near term, but would struggle to push beyond $1.2830 unless the central bank convinces investors that a third hike is on the cards.

On Friday, the loonie was helped by data showing Canada's economy grew for a sixth consecutive month in April, while a central bank survey of business sentiment showed firms were feeling more upbeat.

Speculators have cut bearish bets on the Canadian dollar for a fifth straight week, data from the U.S. Commodity Futures Trading Commission and Reuters calculations showed on Friday. Canadian dollar net short positions tumbled to 49,495 contracts as of June 27 from 82,881 a week earlier.

Canada's trade data for May is due on Thursday and the June employment report is due on Friday.