Loonie holds near 12-day low as oil support fails to offset dollar strength

The Canadian dollar dipped to a 12-day low against the U.S. dollar on Monday, as rising U.S. rate-hike expectations and a stronger greenback offset any support from surging oil prices. The loonie was trading around C$1.392 against the U.S. dollar at 16:43 a.m. ET on Monday, marking a 0.3% decline for the day. Canada's consumer price index increased by 3.0% year-on-year in August, in line with forecasts.

However, the monthly price drop was only 0.1%. The Bank of Canada's preferred median and trimmed-mean inflation measures remained steady at 2.0% and 1.9%, respectively. Despite these figures, the headline inflation rate remained above the Bank's 2% target, revealing no significant acceleration in underlying price pressures. Food inflation eased to 2.8%, with gasoline prices surging by 22.8% year-over-year.

The recent move in the Canadian dollar occurred as investors evaluated the impact of sharp oil price increases on the greenback, amid growing expectations of a U.S. Federal Reserve interest rate hike this week. Brent crude prices soared above $108 a barrel on Monday due to fresh attacks and supply disruptions in the Middle East, fueling concerns about global oil availability.

While higher oil prices typically bolster the Canadian dollar, this latest surge exacerbated inflation concerns, reinforcing the argument for tighter U.S. monetary policy. Market sentiment now favors a 90% probability of a Fed rate hike this week, contributing to the U.S. dollar's rise and the loonie's decline. The Canadian dollar had previously weakened after U.S. inflation data bolstered expectations of a Fed rate increase, trading at C$1.3862 per U.S. dollar on Friday, after dipping to its weakest level since September 2.