Canadian Dollar struggles near April 2025 lows vs bullish USD amid Iran uncertainty

USD/CAD retains a positive bias at the start of a new week amid a bullish USD.
The uncertainty around Iran benefits the safe-haven USD amid the hawkish Fed.
Recovering Oil prices do little to support the Loonie ahead of the Canadian CPI.

Haresh Menghani FXStreet

The USD/CAD pair kicks off the new week on a positive note and trades near the 1.4170-1.4175 region during the Asian session, close to its highest level since April 2025, set last Friday.

The US Dollar (USD) stalls its modest pullback from the highest level since May 2025 amid fresh geopolitical developments over the weekend, and remains a key tailwind for the USD/CAD pair. Iran accused the US and Israel of violating the ceasefire and closed the Strait of Hormuz again in the face of continued Israeli strikes in Lebanon. Adding to this, reports suggest that Iranian negotiators suspended high-stakes talks with the US in response to a flurry of verbal threats by US President Donald Trump to strike Iran again. This, in turn, dents investors' appetite for riskier assets and supports the safe-haven buck.

The Canadian Dollar (CAD), on the other hand, continues with its relative underperformance in the wake of slowing economic growth and the Bank of Canada's (BoC) dovish policy stance compared to the US Federal Reserve (Fed). In fact, investors expect the BoC to hold rates steady through late 2026 as policymakers are prioritizing a sluggish economy over inflation threats. In contrast, the Fed's latest projection indicates that rates could rise to 3.8% by year-end, signaling a 25-basis-point (bps) rate hike in the coming months. The divergent Fed-BoC policy expectations turn out to be another factor pushing the USD/CAD pair higher.

Meanwhile, Crude Oil prices rise around 2% amid concerns about a fragile interim peace agreement between the US and Iran. This might hold back traders from placing aggressive bearish bets around the commodity-linked Loonie as the market focus now shifts to the release of the latest Canadian consumer inflation figures, due later this Monday. This, in turn, acts as a headwind for the USD/CAD pair, though the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices remains to the upside. Hence, any corrective pullback might still be seen as a buying opportunity and is more likely to remain limited.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving 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 taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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