TORONTO (Reuters) - The Canadian dollar edged to a multi-year low against its U.S. counterpart on Tuesday as investors awaited a Federal Reserve interest rate decision and sought protection against additional losses for the currency.

The loonie was trading 0.1% lower at 1.4330 to the U.S. dollar, or 69.78 U.S. cents, after touching its weakest intraday level since the onset of the COVID-19 crisis in March 2020 at 1.4339.

"Demand for protection against a downside move in the loonie has soared," said Karl Schamotta, chief market strategist at Corpay.

"Implied volatility is marching higher, and risk reversals - which measure the cost of insuring against a drop in the Canadian dollar - are showing signs of severe strain."

Implied volatility on an at-the-money options contract to buy or sell Canadian dollars against the U.S. dollar in three months has jumped to roughly 6.4 from 4.5 in July, its highest level since April 2023.

Investors and companies use options to hedge their currency exposure. The currency touched a low of 1.4667 in March 2020.

Domestic political uncertainty has added this week to headwinds for the loonie. The currency has also been pressured by the threat of U.S. trade tariffs and a more aggressive interest rate cutting campaign by the Bank of Canada than the Federal Reserve.

The U.S. dollar advanced against a basket of major currencies ahead of the Fed decision at 2 p.m. EST (1900 GMT), with markets expecting the central bank to deliver its third consecutive interest rate cut.

The price of oil, one of Canada's major exports, was up 1.3% at $70.97 as U.S. crude inventories fell.

Canadian bond yields moved higher across the curve, with the 10-year increasing 2.7 basis points to 3.169%.

(Reporting by Fergal Smith; Editing by Chizu Nomiyama)