USD/CAD extends advance as geopolitical risks keep US Dollar supported

• USD/CAD climbs to multi-week highs as Middle East tensions boost safe-haven demand for the US Dollar.
• Iran rejects US proposal, raising risks of a prolonged conflict and broader economic spillovers.
• Elevated Oil prices complicate the Fed and BoC policy outlook as inflation risks persist.

The Canadian Dollar (CAD) stays on the back foot against the US Dollar (USD) on Thursday, as rising Middle East tensions and ongoing uncertainty around US-Iran negotiations keep the Greenback firmly supported across the board.

At the time of writing, USD/CAD is trading around 1.3848, marking its highest level since January 20 and building on gains for a fourth consecutive day.

Iran has rejected a proposed 15-point plan put forward by the United States aimed at ending the conflict, stating that any agreement would be on its own terms and only once its key conditions are met, including security guarantees and recognition of its strategic control over the Strait of Hormuz.

The pushback has raised concerns about a prolonged conflict, with Press TV citing the Iranian Army as warning that any ground incursion would be “more dangerous and costly” for the United States. The remarks come amid reports of additional US troop deployments to the region.

Meanwhile, US President Donald Trump reiterated that negotiations were ongoing despite Iran’s public denial. In a Truth Social post, he said Iranian negotiators were “begging” for a deal, while warning that time was running out for a diplomatic resolution, adding that there may be “no turning back.”

With both sides maintaining a hardline stance, a near-term resolution appears unlikely, raising the risk of a prolonged conflict and broader economic spillover effects.

Oil prices remain volatile and well above pre-conflict levels, raising inflation expectations and complicating the monetary policy path for both the Federal Reserve (Fed) and the Bank of Canada (BoC).

While both the United States and Canada are net Oil exporters and can benefit from higher prices, a sustained rise in Oil can also hurt demand. Higher energy costs reduce consumers' spending power and can slow economic growth.

Policymakers are closely tracking the situation and could be forced to raise rates if higher Oil prices lead to broader and more persistent inflation pressure. According to the CME FedWatch Tool, markets broadly expect the Federal Reserve to keep rates unchanged through 2026 at 3.50%-3.75%, although expectations for a hike gradually build, with the probability of a move to the 3.75%-4.00% range rising to around 40% by October.

Meanwhile, money markets have also shifted their expectations for the Bank of Canada, now pricing in around 75 basis points of rate hikes by year-end 2026, according to LSEG data cited in a Reuters report published earlier this month.