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Canadian Dollar declines below 1.3800 on safe-haven demand, Fed rate hike bets

  • USD/CAD gains ground around 1.3775 in Wednesday’s early European session. 
  • Traders will closely monitor Trump's efforts to bring an end to ‌the war with Iran.
  • Fed funds futures point to a higher chance of a hike this year. 

The USD/CAD pair holds positive ground near 1.3775 during the early European session on Wednesday. The US Dollar (USD) edges higher against the Canadian Dollar (CAD) amid persistent safe-haven demand as the US-Iran peace talks remain uncertain. 

Iran's Revolutionary Guards said on Wednesday that they had fired missiles at Israel as well as military bases hosting US forces in Kuwait, Jordan, and Bahrain. US President Donald Trump appears to be determined to reach a deal with Iran aimed at ending hostilities ‌in the Middle East. 

However, Iranian officials indicated that they prefer to engage with US Vice President JD Vance in any renewed diplomatic talks rather than with special envoy Steve Witkoff or Jared Kushner. The Greenback strengthens as ongoing tensions in the Middle East boost the safe-haven status. 

Crude oil prices retreat as traders await further developments surrounding US-Iran peace talks. It is worth noting that Canada is a major oil-exporting country, and lower crude oil prices generally have a negative impact on the CAD. 

Federal Reserve (Fed) Governor Michael Barr said on Tuesday that the central bank may need to keep interest rates steady "for some time" before further cuts are warranted, noting continued inflation above the Fed's 2% target and the risks posed by the conflict in the Middle East.

Fed funds futures have priced in nearly a 17.7% chance of a 25-basis-point hike at the Fed's December meeting, compared to a 38.6% odds of a cut a week ago, according to the CME FedWatch tool.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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