The Canadian dollar weakened slightly versus a broadly lower U.S. currency on Tuesday, as a sharp drop in oil prices weighed on the Canadian dollar.

Oil prices fell more than two per cent, their third day of declines, as signs of rising U.S. supply and a gloomy outlook for global demand weighed. That offset the benefit for the loonie from broader greenback weakness after strong German data pushed the euro to a 2-1/2 week high.

At 4 p.m. ET, the Canadian dollar was trading at $1.2735 to the greenback, or 78.52 cents US, down marginally on the day. The currency's strongest level of the session was $1.2701, while it touched its weakest since last Wednesday at $1.2773.

Still, with the U.S. currency boosted by a recent uptick in economic data and the Canadian dollar hit by signs of slowing growth, the loonie could stand to benefit from broader global reflation and any increase in oil prices from here.

"We're at a turning point where usually U.S. [economic] data momentum starts to decelerate and momentum in Canada would start to accelerate," said Mark McCormick, North American head of FX strategy at TD Securities, which is recommending clients position for the Canadian currency to strengthen to $1.2380.

"There's a lot of good news priced into the U.S. [dollar], and a lot of bad news priced into Canada," he said. "There's scope to price in a little bit more from the Bank of Canada early in the year. We're looking for them to hike [interest rates] in January."

The Canadian dollar is unlikely to recapture its tight link with the price of oil even as the interest rate outlook settles, given that crude trades are far removed from levels needed to affect investment in Canada's energy sector, economists and strategists say.

Speculators have cut bullish bets on the Canadian dollar, U.S. Commodity Futures Trading Commission data and Reuters calculations showed on Monday.

Canadian government bond prices were flat to higher across the yield curve, with the two-year unchanged to yield 1.463 per cent and the 10-year up 17 cents to yield 1.949 per cent. Canada's manufacturing sales data for September is due on Thursday and the October inflation report will be released on Friday.

U.S., Canadian and Mexican negotiators hope to make modest progress in the next round of North American Free Trade Agreement talks in Mexico City this week.