USD/CAD extends losses below 1.3700 on broad-based US Dollar weakness
- The US Dollar extends its reversal from Monday's high, crushed by increasing concerns about the Fed's independence.
- Trump attacked Fed Chairman Powell again and suggested an early pick of his replacement.
- The Canadian Dollar appreciated 0.5% so far this week, despite the headwinds from lower Oil prices.
The US Dollar has reversed Wednesday’s mild recovery and is accelerating its downtrend on Thursday as Trump’s attacks on the Fed’s independence and reviving fears that unilateral trade tariffs might lead to stagflation are crushing confidence in the US Dollar.
US President Trump called Fed Chair President names and weighed the possibility of an early appointment of his successor, an unprecedented action that would erode the credibility of the central bank. The market has reacted by selling the US Dollar heavily.
These comments come after the Fed President maintained his cautious stance towards interest rate cuts as he said the bank is in a good position to handle a likely increase in inflation, as the impact of tariffs filters into the economy.
Hopes of Fed cuts and fears of stagflation are hurting the USD
The pressures on the central bank, however, coupled with recent comments from Fed officials advocating for a less restrictive monetary policy, are boosting hopes for a rate cut in the coming months. The CME Fed Watch tool is pricing a 24% chance of a cut in July and 90% in September, up from 14% and about 65% in the previous week.
Beyond that, the lack of progress in the deals with trade partners is getting investors increasingly uneasy as the June 9 deadline approaches. A report from JP Morgan has warned about a potential stagflationary effect from tariffs that has increased the chances of a recession in the second half of the year to 40%
In this context, the Canadian Dollar has kept appreciating, with the USD/CAD nearly 0.5% lower in the week despite a more than 16% decline in Oil prices, which is Canada’s main export.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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