(Updates prices and market activity)
    * Canadian dollar strengthens 0.7% against the greenback
    * Bank of Canada leaves key rate at 0.25%
    * Canada's annual inflation rate slows to 0.7% in December
    * Canadian bond yields rise across the curve

    By Fergal Smith
    TORONTO, Jan 20 (Reuters) - The Canadian dollar strengthened
to a near three-year high against its U.S. counterpart on
Wednesday as the Bank of Canada opted against cutting interest
rates and Wall Street scaled record highs.
    The arrival of a COVID-19 vaccine and stronger foreign
demand is brightening the outlook for the Canadian economy in
the medium term, the Bank of Canada said, as it held its key
overnight interest rate at 0.25%.             
    Money markets had seen a chance of a so-called micro rate
cut of less than 25 basis points, after the BoC said in recent
months that the floor for rates could be less than the current
level and COVID-19 lockdowns weighed on Canada's economy. The
central bank has ruled out negative rates. 
    "I never really bought into the idea of a mini rate cut in
Canada just because it doesn't really provide any extra stimulus
against the current economic downturn in Q1 (the first quarter),
 said Simon Harvey, senior FX market analyst for Monex Europe
and Monex Canada.
    "I think markets are just unwinding those positions now,"
Harvey said. 
    The S&P 500 notched an all-time high and the price of oil
      , one of Canada's major exports, settled up 0.5% as Joe
Biden became the 46th U.S. president, with investors expecting
his administration to deliver massive stimulus spending.
                        
    The Canadian dollar        was trading 0.7% higher at 1.2646
to the greenback, or 79.08 U.S. cents. The currency touched its
strongest since April 2018 at 1.2606.
    Canada's annual inflation rate slowed to 0.7% in December
from 1.0% the previous month amid a new round of lockdowns,
Statistics Canada said.             
    Canadian government bond yields were higher across the
curve, with the 10-year             up 3.1 basis points at
0.833%, as the market weighed the potential for less Bank of
Canada bond purchases later this year.

 (Reporting by Fergal Smith; Editing by Kirsten Donovan, Nick
Zieminski and David Gregorio)