TORONTO (Reuters] - On Tuesday, the Canadian dollar fell against its U.S counterpart, regaining some of the sharp gains from Monday's day. This was due to falling oil prices and unexpected trade deficits in domestic data.

After trading in a range between 1.2665 and 1.2721, the loonie traded 0.3% lower at 1.2706 against the greenback or 78.70 U.S.cents.

Edward Moya, OANDA's senior market analyst in New York, said that some of the weakness can be attributed to the pullback with crude oil prices. "The constant rally with oil seems to be exhausting."

Oil, Canada's main export, dropped as investors feared that the resumption indirect talks between the United States of Iran could revive an international nuclear agreement and allow for more oil exports from the OPEC producer.

U.S. crude oil futures closed 2.2% lower at $89.36 per barrel. However, the U.S. Dollar advanced against a basket major currencies. The Federal Reserve's recent hawkish tone supported it.

"Markets are anticipating an aggressive Fed, and that could be confirmed by the inflation report later in the week."

On Thursday, the U.S. Consumer Price Index data for January will be available.

The loonie gained 0.8% Monday, its largest gain in almost four weeks.

Canada's December trade deficit was C$137 million. This is significantly higher than the C$2.5 trillion surplus economists expected. It happened because imports reached a new record high, while exports dropped from November.

The yields on Canadian government bonds were higher throughout the curve with the 10-year rising 1.6 basis points to 1.854%.

It dropped 2.5 basis points below its U.S. counterpart, creating a gap of 10.3 base points in favor U.S. bonds. This is the largest gap since September 2013.