TORONTO (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Tuesday as oil prices climbed on the escalating Middle East conflict and domestic data showed factory activity rising for the first time in 17 months.

The price of oil, one of Canada's major exports, climbed 3.8% to $70.78 a barrel following reports Iran was preparing to launch a missile attack on Israel.

"The Iran-Israel conflict has triggered a risk-off sentiment in the financial markets, leading to a drop in U.S. yields and a spike in oil prices," said Tony Valente, a senior FX dealer at AscendantFX. "This combination is contributing to a rise in the CAD."

The Canadian dollar was trading 0.2% higher at 1.35 per U.S. dollar, or 74.07 U.S. cents, recovering after touching its weakest level since Sept. 24 at 1.3539 earlier in the day.

The yen was the only other Group of 10 currency to notch gains against the U.S. dollar as investors favored safe-haven currencies, but the loonie's advance was larger.

The G10 currencies include 10 of the most heavily traded currencies in the world.

The greenback benefited from data showing a solid U.S. economy a day after Federal Reserve Chair Jerome Powell pushed back against the likelihood of another 50-basis point rate cut in November.

The S&P Global Canada Manufacturing Purchasing Managers' Index increased to 50.4 in September from 49.5 in August, its first move above the 50.0 no-change mark since April 2023.

The data "indicated improvements in new orders, employment, and overall confidence in the manufacturing sector since August," Valente said.

Canadian bond yields were mixed across a flatter curve, playing catch-up with moves in U.S. Treasuries on Monday when the Canadian market was closed.

The 2-year rose 1.1 basis points to 2.920%, while the 10-year was down 3.5 basis points at 2.921%.

(Reporting by Fergal Smith; Editing by Andrea Ricci)

By Fergal Smith