The US dollar rose from five-month lows near 1.3640 against the Canadian dollar last week, but upside attempts remain limited below 1.3700. The pair posted marginal losses on Tuesday, with the Canadian dollar supported by a moderate rise in oil prices as market focus turns to the release of minutes from the US Federal Reserve’s latest monetary policy meeting.
The Fed cut interest rates by 25 basis points in December and hinted at another rate cut in 2026. However, the meeting minutes likely reflect wide disagreement among committee members, fueling market expectations of a deeper easing cycle in 2026.
Moreover, US President Trump is on the cusp of nominating a successor to Chairman Jerome Powell, whose term ends in May, and Trump has identified support for radically lowering interest rates as a sine qua non for the next Fed head.
If we look from a broader perspective, the US dollar (USD) was one of the weakest performers among the major currencies in 2025. The dollar is set to end the year down about 20% against the Canadian dollar, affected by the deteriorating economic outlook, erratic trade policies of President Trump, and more recently also due to the monetary policy divergence between the Federal Reserve and the Bank of Canada.
On Tuesday, the Canadian dollar got some support from a moderate rise in oil prices, Canada’s main export. Fading hopes for an upcoming peace deal in Russia and rising tensions with Iran are likely to keep sanctions on two of the world’s top crude oil exporters unchanged, alleviating fears of overproduction in 2026.
Frequently asked questions about the Canadian dollar
The main factors that move the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of oil, Canada’s largest export, the health of its economy, inflation and the trade balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are moving into riskier assets (risk on) or looking for safe havens (risk off) – with risk being positive for the Canadian dollar. As its largest trading partner, the health of the US economy is also a major factor affecting the Canadian dollar.
The Bank of Canada (BoC) has significant influence on the Canadian dollar by setting the level of interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The Bank of Canada’s main goal is to keep inflation at 1-3% by adjusting interest rates up or down. Relatively high interest rates tend to be positive for the Canadian dollar. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD negative and the latter positive.
The price of oil is a major factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so oil prices tend to have an immediate impact on the value of the Canadian dollar. In general, if the price of oil rises, the Canadian dollar also rises, as overall demand for the currency increases. The opposite is the case if the price of oil falls. Higher oil prices also tend to increase the likelihood of a positive trade balance, which also supports the Canadian dollar.
While inflation has always been thought to be a negative factor for a currency because it reduces the value of money, the opposite is the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to prompt central banks to raise interest rates, attracting more capital flows from global investors looking for a profitable place to keep their money. This increases the demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases measure the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing PMIs, services, employment and consumer surveys can all influence the direction of the Canadian dollar. A strong economy is good for the Canadian dollar. Not only does it attract more foreign investment, it may encourage the Bank of Canada to raise interest rates, leading to a stronger currency. If economic data is weak, the Canadian dollar will likely fall.
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