* Canadian dollar strengthens 0.3% against the greenback * Canada"s annual inflation rate slows to 0.7% in December * Price of U.S. oil rises 1.3% * Canadian bond yields rise across the curve By Fergal Smith TORONTO, Jan 20 (Reuters) - The Canadian dollar strengthened against its U.S. counterpart on Wednesday as investors bet the U.S. would heavily stimulate its economy and the Bank of Canada would look past a drop in inflation. Canada"s annual inflation rate slowed to 0.7% in December, down from a year-on-year increase of 1.0% in November, while the average of the Bank of Canada"s three core measures dipped to 1.6% from 1.7%, data from Statistics Canada showed. Still, the dip in underlying inflation "is not a big sea-change in terms of the drivers," said Derek Holt, vice president of capital markets economics at Scotiabank. The Bank of Canada is likely to keep its focus on the outlook over the next one or two years, Holt said. The central bank is due to make an interest rate decision at 10 a.m. (1500 GMT). World shares and the price of oil, one of Canada"s major exports, gained on bets of hefty U.S. spending after U.S. Treasury Secretary nominee Janet Yellen urged lawmakers to "act big" to save the economy and worry about debt later. U.S. crude oil prices were up 1.3% at $53.64 a barrel, while the Canadian dollar rose 0.3% to 1.2687 per greenback, or 78.82 U.S. cents. The currency traded in a range of 1.2689 to 1.2745. Canadian home prices rose 0.6% in December from November, the strongest increase for a December since 2009, led by gains in Victoria, Halifax and Ottawa-Gatineau, data showed. Canadian government bond yields were higher across the curve, with the 10-year up 1.6 basis points at 0.818%. (Reporting by Fergal Smith; Editing by Kirsten Donovan)