USD/CAD extends rally to near 1.3830 amid uncertainty over Middle East conflicts
- USD/CAD rallies further to near 1.3830 as investors remain on edge amid Middle East conflicts.
- The Fed is unlikely to deliver any dovish monetary policy adjustment this year.
- Higher oil prices are expected to keep the Canadian Dollar broadly on the front foot.
The USD/CAD pair extends its winning streak for the fourth trading day on Thursday and jumps to near 1.3830 during the Asian trading session, the highest level seen in two months.
The Loonie pair trades firmly as the US Dollar (USD) rises amid uncertainty surrounding the war in the Middle East, which involves the United States (US), Israel, and Iran. As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto Wednesday’s gains around 99.65.
The safe-haven demand of the US Dollar remains firm as Iran continues to push back hopes of de-escalation in Middle East conflicts, stating that it is not directly involved in negotiations with the US.
Regarding the month-long ceasefire proposal and 15-point settlement plan, Iran said that the Pakistan-delivered proposal was excessive and demanded sovereignty over the Strait of Hormuz. A senior Iranian official said talks could be held in Pakistan or Turkey if they proceed, Reuters reports.
On the domestic front, traders remain confident that the Federal Reserve (Fed) will not cut interest rates this year, as surging energy prices have de-anchored inflation expectations.
Meanwhile, the Canadian Dollar (CAD) underperforms its major currency peers, except antipodeans, as investors remain on edge amid the Middle East war. However, the broader outlook of the Loonie remains firm amid higher oil prices.
Given that Canada is a net oil exporter, higher oil prices due to an energy supply shock is a favorable situation for the Canadian Dollar.
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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