USD/CAD rises as US Dollar gains on geopolitical tensions and Fed repricing
- USD/CAD edges higher as the US Dollar strengthens amid escalating US-Iran tensions.
- Markets scale back Fed rate-cut bets as rising Oil prices fuel inflation concerns.
- Traders await US PCE inflation data and Canada’s labor market report due on Friday.
The Canadian Dollar (CAD) edges lower against the US Dollar (USD) on Thursday, pressured by sustained demand for the Greenback amid the ongoing US-Iran war. At the time of writing, USD/CAD is trading around 1.3621, extending its rebound after falling to one-month lows near 1.3525 earlier this week.
However, elevated Oil prices, driven by supply disruption risks in the Strait of Hormuz, could provide some support to the commodity-linked Loonie, given Canada’s role as a major crude exporter.
Iran’s new Supreme Leader, Mojtaba Khamenei, said on Thursday that the closure of the Strait of Hormuz should continue as a tool to pressure Iran’s enemies, signaling a hardline stance as the conflict expands and raising fears of prolonged disruptions to global Oil supplies.
While higher Oil prices typically support the CAD, the Greenback is gaining the upper hand in the current environment. The Greenback’s dominant role in the global financial system and strong demand for liquidity during periods of geopolitical stress continue to underpin the USD. Moreover, since Oil is priced in US Dollars, global buyers must hold USD to purchase energy supplies.
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is trading around 99.70, hovering near its highest level since November 2025.
Meanwhile, markets worry that a prolonged rise in Oil prices could stoke inflation, potentially forcing central banks to keep interest rates higher for longer or even consider tightening.
As a result, traders have scaled back expectations for Federal Reserve (Fed) interest rate cuts. Markets no longer fully price in even one 25 basis point (bps) cut in 2026, marking a sharp repricing from earlier expectations before the conflict began, providing an additional tailwind for the US Dollar. Across the border, the Bank of Canada (BoC) is expected to keep interest rates on hold through 2026.
On the data front, US Initial Jobless Claims for the week ending March 7 fell to 213K from an upwardly revised 214K in the previous week, coming in slightly below the 215K forecast. Housing Starts rose to 1.487 million, exceeding market expectations of 1.35 million.
Attention now turns to a heavy slate of US economic data due on Friday, including the Personal Consumption Expenditures (PCE) Price Index, the preliminary Q4 Gross Domestic Product (GDP) annualized reading, Durable Goods Orders, and the University of Michigan Consumer Sentiment and Expectations Index. In Canada, traders await the latest labor market data.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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