* Canadian dollar at C$1.2274, or 81.43 U.S. cents
* Bond prices mixed across steeper yield curve
* Domestic manufacturing sales fall 2.6 percent in July
By Fergal Smith
TORONTO, Sept 19 (Reuters) - The Canadian dollar edged higher on Tuesday against its U.S. counterpart, shrugging off soft domestic manufacturing data and lower oil prices as the greenback broadly fell ahead of a Federal Reserve interest rate decision on Wednesday.
At 4 p.m. EDT (2000 GMT), the Canadian dollar CAD=D4 was trading at C$1.2274 to the greenback, or 81.47 U.S. cents, up 0.2 percent. The currency traded in a range of C$1.2255 to C$1.2309.
The loonie was paring some losses from the day before, when a Bank of Canada policymaker said the currency's strength will be a factor in future rate decisions. touched on Monday its weakest in nearly two weeks at C$1.2338.
"We are really just treading water ahead of tomorrow's announcement by the Fed," said Michael Goshko, corporate risk manager at Western Union Business Solutions.
The U.S. dollar .DXY weakened against a basket of currencies in advance of the Fed decision. Policymakers are expected to decide on the reduction of the central bank's $4.2 trillion worth of bond holdings.
Canadian manufacturing sales dropped by 2.6 percent in July, the most in more than a year, as annual auto plant shutdowns cut sales of cars and motor vehicle parts. of oil, one of Canada's major exports, retreated from near-five-month highs in advance of data expected to show a build in U.S. crude inventories as imports resume and refineries were still restarting after recent storm activity. posted a budget deficit of C$17.8 billion ($14.5 billion) for the 2016-17 fiscal year, the Finance Department said, below the preliminary deficit of C$21.85 billion reported in May. government bond prices were mixed across a steeper yield curve, with the two-year CA2YT=RR up 2 Canadian cents to yield 1.557 percent and the 10-year CA10YT=RR down 10 Canadian cents to yield 2.094 percent.
Canada's August inflation report and retail sales data for July are due on Friday.