Canadian Dollar gains ground as rebounding oil prices soften USD/CAD
- USD/CAD depreciates as rebounding crude oil prices near $95.80 per barrel bolster the commodity-linked Canadian Dollar against the US Dollar.
- Ongoing US-Iran diplomatic negotiations and Qatari mediation efforts help temper immediate geopolitical fears in energy markets.
- Safe-haven demand and US midterm election uncertainty continue to limit broader downside risks for the USD.
USD/CAD inches lower after posting modest gains in the previous day, trading around 1.3990 during Asian hours on Tuesday. The currency pair is experiencing downward pressure as the Canadian Dollar (CAD) receives support from a modest recovery in crude oil prices. Canada, being the largest crude oil exporter to the United States (US), sees its currency heavily tied to energy markets. West Texas Intermediate (WTI) crude has regained some ground, trading around $95.80 per barrel, following a steep drop of nearly 7% in the previous session.
However, potential gains in oil prices remain constrained by ongoing geopolitical developments. Crude prices could face further headwinds as Iran confirmed that indirect discussions with the United States aimed at resolving their eight-month conflict are still underway. The talks follow several days of negotiations between Iranian officials and Qatari mediators, which yielded revised proposals without achieving a major breakthrough.
Iranian Foreign Minister Abbas Araqchi noted that consultations remain intensive, stating that their conditions have been presented and further progress depends on Washington's political decisions. Meanwhile, US President Donald Trump previously indicated he would refrain from military action against Iran before the midterm elections.
Political developments in the United States are also influencing the broader economic environment. As American voters head to the polls for the midterm elections, the Trump administration and the Republican Party face mounting pressure regarding elevated energy prices. Current polling suggests Democrats are favored to win the House of Representatives, while control of the Senate remains closely contested.
Despite the Canadian Dollar's current support, losses for the USD/CAD pair may be limited as the safe-haven US Dollar gets a boost from election-related uncertainty. The midterms have raised concerns over potential shifts back toward inflation and deficit issues. Consequently, rate expectations have adjusted slightly, with the CME FedWatch Tool currently pricing in roughly a 73% probability of a US Federal Reserve rate hike in December, down from 80% a week earlier.
Dollar softens as Fed patience and AI growth concerns weigh on yields
Strategists at Brown Brothers Harriman note that the Dollar and short-term Treasury yields “drifted lower last week as Fed Chair Kevin Warch struck a patient tone despite stalled progress on US inflation.” They add that “concerns about an AI investment slowdown compounded the move, casting doubt on the US growth outlook and dampening Fed rate hike expectations.”
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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