USD/CAD edges up to near 1.4000 even as US Dollar underperforms
- USD/CAD trades slightly higher despite the US Dollar weakens amid soft US PPI data for April.
- The US PPI surprisingly deflated on month, likely encourage Fed officials to cut interest rates.
- Rising Canadian jobless rate boosts BoC dovish bets.
The USD/CAD pair ticks up to near the psychological level of 1.4000 during North American trading hours on Thursday. The Loonie pair trades higher despite the US Dollar (USD) trading lower following the release of the United States (US) Producer Price Index (PPI) data for April.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, is down 0.3% to near 100.70.
The US Bureau of Labor Statistics (BLS) showed that business owners surprisingly reduced prices of goods and services on a monthly basis. Both the headline and core PPI deflated by 0.5% and 0.4%, respectively. On year, the headline PPI rose at a slower pace of 2.4%, compared to estimates of 2.5% and the March reading of 2.7%. In the same period, the core PPI – which strips off volatile food and energy items – decelerated to 3.1%, as expected, from the prior reading of 4%.
Soft US PPI data paves the way for interest rate cuts by the Federal Reserve (Fed). However, it is expected to be a short-term relief for Fed officials as consumer inflation expectations are elevated in due to the fallout of tariffs by US President Donald Trump.
Meanwhile, a sharp decline in the Oil price has weighed heavily on the Canadian Dollar (CAD). The currency weakens amid growing expectations that the Bank of Canada (BoC) could resume the monetary expansion cycle, which it paused in April amid global economic uncertainty in the wake of tariffs announced by US President Trump. BoC dovish bets have accelerated due to the rising Unemployment Rate.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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