The Canadian dollar firmed up against its major counterparts in the European session on Tuesday, as oil prices rallied on a weak U.S. dollar in the wake of the Fed's new inflation policy.

Crude for October delivery rose $0.45 to $43.06 per barrel.

The dollar sank to more than two-year lows, hit by fears about the pace of economic recovery, uncertainty ahead of the U.S. presidential election in November and speculation that the Federal Reserve will keep interest rates very low for years.

A lower U.S. currency makes dollar-denominated commodities cheaper for consumers in other currencies.

Strong Chinese manufacturing data also lifted oil prices. A private survey showed China's factory activity expanded at the fastest clip in nearly a decade in August.

The Caixin/Markit Manufacturing Purchasing Managers' Index rose to 53.1 from 52.8 in July amid the sharpest increase in output and new orders since 2011.

New export work rose for the first time this year, while employment moved closer to stabilization.

Investors await U.S. stockpile data from the American Petroleum Institute later today for further direction.

The loonie climbed to a session's high of 81.42 against the yen, from a low of 81.11 set at 9:15 pm ET. Should the loonie rises further, 82.5 is seen as its next resistance level.

Breaking the 1.30 level, the loonie jumped to 1.2994 against the greenback, which was its highest level since January 6. The loonie may test resistance around the 1.25 level.

The loonie edged higher to 1.5554 against the euro, after falling to a 1-week low of 1.5608 at 10:30 pm ET. On the upside, 1.54 is likely seen as the next resistance for the loonie.

Final survey data from IHS Markit showed that the euro area manufacturing sector expanded at a moderate pace, as initially estimated, in August despite the severe constraints on economic activity related to fighting the global coronavirus disease.

The manufacturing Purchasing Managers' Index fell slightly to 51.7 in August from 51.8 in July. The reading matched the flash estimate.

The loonie hit 0.9594 against the aussie, marking a 4-day high. The next possible resistance for the loonie is seen around the 0.94 level.

Australia's central bank maintained its key interest rate at a record low and quantitative easing unchanged but increased the size of the Term Funding Facility.

The board of Reserve Bank of Australia, governed by Philip Lowe, decided to maintain cash rate and the targeted yield on three-year government bonds of 25 basis points.

Looking ahead, the U.S. construction spending for July and ISM manufacturing for August will be released at 10:00 am ET.

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