Canadian Dollar dips as Fed, US yields support the US Dollar
USD/CAD edges higher on Friday, trading around 1.4000 at the time of writing, up 0.10% on the day. The US Dollar (USD) remains supported by expectations of further interest rate hikes from the Federal Reserve (Fed), while the rebound in US Treasury yields adds to the Greenback’s appeal.
On Friday, the Canadian Dollar (CAD) experienced a minor dip against the US Dollar (USD) as the Federal Reserve's (Fed) interest rate hike bolstered the Greenback. The Fed increased its benchmark rate by 25 basis points (bps) to a range of 3.75%-4%, its first hike since 2023. This move was prompted by rising energy prices, which maintain inflation risks, and the Fed's inclination to retain a restrictive monetary policy.
Sixteen of the 18 Fed officials anticipate at least one additional rate hike this year, suggesting that borrowing costs may remain high for an extended period. Consequently, the US Dollar Index (DXY) rose above 100.50, its highest level in seven weeks. Meanwhile, Canadian oil prices climbed, providing some support to the CAD and preventing USD/CAD from surging.
Scotiabank analysts note that the CAD is "flirting with the 1.40 level in early trade Friday," with "minor losses" due to the overall bullish USD trend rather than CAD-specific factors. They caution that "spot does remain somewhat overvalued relative to our fair value estimate (1.3910)" and suggest that weakening CAD may hinder the Bank of Canada (BoC) in addressing inflation concerns.
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