The USD/CAD pair saw some bullish activity during the Asian session on Wednesday, staying above the 1.3775 mark—the highest level since mid-April reached yesterday. Current spot prices are lingering just above mid-$1.3700, supported largely by the robust US dollar.
The USD index (DXY), which reflects the dollar’s strength against a range of currencies, reached its highest point since April 7 on Tuesday. This surge comes amid ongoing geopolitical tensions and expectations of a hawkish stance from the US Federal Reserve. Recently, President Donald Trump delayed plans to attack Iran at the request of Gulf leaders, although he mentioned that military action could still be necessary.
Meanwhile, negotiations for peace are gridlocked, particularly regarding Iran’s nuclear program and the critical Strait of Hormuz. The persistent geopolitical risks are bolstering demand for the safe-haven US dollar. Additionally, the conflict between the U.S. and Iran has kept oil prices elevated, raising concerns about inflation and reinforcing expectations that the U.S. central bank might raise interest rates.
Traders are now factoring in over a 55% likelihood that the Fed will increase borrowing costs by at least 25 basis points (bps) in 2026, per the CME Group’s FedWatch tool. This optimistic outlook is contributing to rising U.S. Treasury yields, which is one more element bolstering both the dollar and the USD/CAD pair. Still, bullish sentiment appears cautious leading into the upcoming FOMC meeting.
On another note, the upward trend in oil prices offsets the impact of Canadian consumer inflation data that came in below expectations on Tuesday, which might help the commodity-linked loonie avoid further declines. However, the general fundamentals suggest that the USD is likely to see upward momentum, indicating that any corrective pullback in the USD/CAD pair may be seen as a buying opportunity.
Canadian Dollar Frequently Asked Questions
Key factors influencing the Canadian dollar (CAD) include interest rates set by the Bank of Canada (BoC), oil prices—Canada’s largest export—the state of the economy, inflation, and trade balance. Market sentiment also plays a role, with investors either taking on risky assets or seeking safer alternatives. Typically, a risk-on environment favors the Canadian dollar, while the economic health of the U.S., Canada’s largest trading partner, is also crucial.
The BoC significantly influences the Canadian dollar through interest rate policies that affect all lending rates. Its main goal is to maintain inflation between 1 and 3 percent by adjusting rates. Generally, higher interest rates are beneficial for the CAD. The BoC can also employ quantitative easing and monetary tightening, impacting credit conditions in ways that can affect the CAD’s value.
Oil prices are vital to the Canadian dollar’s value since oil is the country’s largest export. When oil prices rise, the CAD usually strengthens due to increased demand for the currency. Conversely, falling oil prices can lead to the opposite effect. Better oil prices often correlate with a more favorable trade balance, supporting the dollar.
Though inflation has typically been viewed negatively for currencies—since it diminishes money value—this perspective can differ nowadays. Rising inflation can drive central banks to lift interest rates, attracting global investors searching for profitable investment opportunities. This ultimately increases demand for the local currency, in Canada’s case, the CAD.
The release of macroeconomic data can provide insight into economic health and significantly impact the Canadian dollar. Indicators such as GDP, manufacturing and service PMIs, employment rates, and consumer sentiment surveys can sway the CAD’s direction. A stronger economy typically boosts the CAD by attracting foreign investment and potentially prompting interest rate hikes from the BoC.
