Oil, one of Canada's major exports, was boosted by a pause in talks to end U.S. sanctions on Iranian crude.

U.S. crude oil futures settled up 2.8% at $73.66 a barrel, while the Canadian dollar was trading 0.9% higher at 1.2357 to the greenback, or 80.93 U.S. cents. It was the biggest gain since May 6.

Earlier in the session, the loonie touched its weakest level since April 26 at 1.2486. It fell 2.4% last week after the Fed projected it would begin raising interest rates in 2023 rather than in 2024.

Still, Canadian yields have climbed more than their U.S. counterparts since the Fed meeting. The 2-year spread was at 20 basis points in favor of Canada's bond on Monday, the widest gap since March last year.

Market projections for Bank of Canada tightening looked unrealistic to some investors before the Fed announcement, said Ian Pollick, global head, FICC strategy at CIBC Capital Markets.

"What we learned is that these expectations are less 'odd' on a relative basis and therefore it reinforces current pricing," Pollick said.

With fiscal spending booming and households flush with cash, investors are betting that the BoC's next tightening cycle, expected to begin in 2022, will result in interest rates climbing above the previous peak for the first time in decades.

Canadian bond yields were higher across the curve, with the 10-year up 6 basis points at 1.424%.

The gap between 2- and 10-year rates widened by 6.2 basis points to 97.6 basis points in favor of the longer-dated bond, after hitting on Friday the smallest spread in four months.

(Reporting by Fergal Smith; Editing by Andrea Ricci and Peter Cooney)

By Fergal Smith