(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)