USD/CAD trades lower around 1.3720 as US Dollar retraces
- USD/CAD corrects to near 1.3725 as the US Dollar struggles to extend its upside.
- Traders pare Fed dovish bets as prices of products that are imported to the US have increased.
- Trade tensions between the US and Canada have weighed on the Canadian Dollar.
The USD/CAD pair is down 0.25% to near 1.3725 during the European trading session on Friday. The Loonie pair faces a slight selling pressure as the US Dollar (USD) retraces after failing to extend its two-week rally. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects to near 98.30 from an over three-week high around 99.00.
The US Dollar drops while investors seek fresh cues on trade talks between the United States (US) and the Eurozone. European Union (EU) trade chief Maros Sefcovic headed to Washington on Wednesday for fresh round of trade talks. Trade negotiations between both economies soured after US President Donald Trump imposed 30% tariffs on imports from the trading bloc last weekend.
On the domestic front, growing market expectations that the Federal Reserve (Fed) will keep interest rates in the current range of 4.25%-4.50% for longer will continue to support the US Dollar.
According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the September meeting has reduced to 58% from 70.4% seen a week ago. Traders pared Fed dovish bets after the US Consumer Price Index (CPI) data for June showed that prices of goods rose that are largely imported.
Meanwhile, the Canadian Dollar (CAD) trades lower among risk-perceived currencies amid trade tensions between the US and Canada. Over the weekend, US President Trump imposed 30% tariffs on imports from Canada, which are separate from sectoral levies.
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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