Canadian Dollar Gains Ground for 2nd Session

The Canadian dollar rebounded to 1.39 per US dollar as a pullback in the greenback and hopes for a Middle East ceasefire offset signs of cooling domestic activity. The loonie found relief after touching its lowest levels since December as the US dollar index dropped on signals that the US aims to restore vessel flows and end the conflict with Iran within weeks. President Donald Trump indicated that a ceasefire was requested although he noted the US will only agree once the Strait of Hormuz is secure and fully operational which helped pull oil prices back from recent highs. However, the loonie faced headwinds as Canadian manufacturing performance stagnated in March with the sector index falling to 50.0 amid higher prices and tariff concerns. Consequently the Canadian dollar remains sensitive to shifting geopolitical tensions and the probability of the Federal Reserve keeping interest rates unchanged through the year.

The Canadian dollar weakened toward 1.395 per US dollar, the lowest since December as a broadly stronger greenback and safe haven demand overshadowed a third consecutive month of domestic economic expansion. While a flash estimate showed the Canadian economy grew 0.2% in February behind a recovery in mining and financial services, the loonie struggled to capitalize on the growth as the US dollar strengthened amid persistent geopolitical instability. Fears of a prolonged conflict and the closure of the Strait of Hormuz continue to underpin the greenback's status as the primary reserve currency despite a recent pullback in US Treasury yields. Federal Reserve Chair Jerome Powell suggested that inflation expectations remain anchored in the long term though the potential for a larger US defense budget has led markets to price out near term rate cuts. Consequently the loonie remains vulnerable to the diverging fiscal outlooks and the risk of a sustained supply shock in the Persian Gulf.

The Canadian dollar weakened past 1.39 per US dollar to hit a December low as persistent geopolitical friction and hawkish Federal Reserve expectations bolstered the greenback. Although energy prices have surged to 2022 highs amid the effective closure of the Strait of Hormuz the commodity-linked Loonie struggled to gain traction against a broadly firmer US dollar. Market skepticism regarding a Middle East de-escalation intensified after Iran rejected a 15-point US peace proposal and dismissed claims of ongoing negotiations while the US deployed additional troops to the region. These developments have fueled inflationary concerns and led traders to price out further Federal Reserve rate cuts with increasing bets on a potential hike by year-end. Rising US Treasury yields and the greenback's status as a global reserve currency continue to pressure the loonie while the Bank of Canada maintains its 2.25% policy rate.