The US Dollar (USD) advanced for the second consecutive session on Friday, lifting the USD/CAD pair above the key 1.4000 level. The pair retraced earlier losses as investors favored the Greenback amid fading expectations of a near-term Federal Reserve rate cut and a mild risk-off tone in global markets. On the week, USD/CAD remains little changed overall.
Fed’s Hawkish Message Reinforces USD Strength
The Dollar rebounded sharply from weekly lows near 1.3890, following the Federal Reserve’s policy announcement on Wednesday. While the central bank cut its Federal Funds rate by 25 basis points to a three-year low of 3.75%–4.00%, Chair Jerome Powell’s subsequent remarks were notably hawkish.
Powell cautioned that a December rate cut is “far from assured,” emphasizing differing views within the Committee. His comments lifted US Treasury yields and revived USD demand across the board, reinforcing the Greenback’s advantage against the Canadian Dollar and other major peers.
Trade Truce Extension and Risk Sentiment
In addition, optimism surrounding the framework agreement reached between US President Donald Trump and Chinese Premier Xi Jinping supported broader market confidence. The deal includes an extension of the existing trade truce, with the US pledging to reduce tariffs on Chinese imports in exchange for continued rare earth exports and resumed purchases of US soybeans. The news added another layer of support to the USD heading into the weekend.
Bank of Canada Eases Policy but Signals Caution
Meanwhile, the Bank of Canada (BoC) also moved to ease monetary conditions on Wednesday, cutting its benchmark interest rate by 25 basis points to 2.25%. Governor Tiff Macklem hinted that the BoC may be nearing the end of its current easing cycle but stressed that the central bank remains prepared to act if the economic outlook deteriorates.
The Canadian Dollar (CAD) initially firmed after the announcement but has since weakened, pressured by a stronger USD, lower oil prices, and a cautious market tone.
Oil Prices Weigh on the Loonie
Falling oil prices — a key driver for the CAD — have added to the currency’s underperformance. West Texas Intermediate (WTI) crude has slipped nearly 2% this week, trading just above $60.00 per barrel after retreating from highs near $62.50 last week. Weaker crude demand expectations continue to act as a headwind for the oil-linked Canadian Dollar.
Outlook
With the Fed’s hawkish tone, a diminished likelihood of a December rate cut, and renewed risk aversion, the USD/CAD pair may find continued support above the 1.4000 mark in the near term. However, any rebound in oil prices or stronger Canadian data could offer temporary relief for the Loonie.