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USD/CAD drifts lower as improving risk sentiment pressures US Dollar

  • USD/CAD eases as the US Dollar Index falls to a one-week low.
  • Improving sentiment around a potential US-Iran de-escalation weighs on the Greenback, though risks around the Strait of Hormuz persist.
  • Strong US data fails to lift the USD, while Canada’s PMI signals stagnation, leaving the pair driven mainly by Dollar dynamics.

USD/CAD trades with a softer tone on Wednesday, as a pullback in the US Dollar (USD) lends support to the Canadian Dollar (CAD). The pair is trading around 1.3891 at the time of writing, retreating after touching its highest level since December 2025 earlier this week.

The US Dollar is under pressure as recent comments from US President Donald Trump suggesting the US-Iran war could end within “two or three weeks” have improved risk appetite and reduced demand for the Greenback as a safe-haven asset.

However, the situation remains far from resolved, with tensions still centered around the reopening of the Strait of Hormuz. Donald Trump said in a post on Truth Social that Iran’s leadership had requested a ceasefire, adding that Washington would consider it only if the Strait of Hormuz is “open, free and clear.” He warned that until then, the US would continue military operations.

Meanwhile, Iran pushed back on the claim, with a Foreign Ministry spokesperson saying that reports of Tehran requesting a ceasefire are false, according to Al Jazeera.

While hopes of de-escalation have pushed Oil prices lower from recent highs, they remain elevated compared to pre-conflict levels but have failed to provide meaningful support to the commodity-linked Loonie, leaving USD/CAD largely driven by US Dollar dynamics.

Meanwhile, stronger US economic data failed to provide support to the Greenback. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is hovering near 99.40, close to a one-week low after touching ten-month highs of 100.64 on Tuesday.

The ISM Manufacturing PMI rose to 52.7 in March, beating expectations of 52.5 and improving slightly from the previous 52.4. The ADP Employment Change rose by 62K in March, beating expectations of 40K but easing from the previous reading of 66K (revised from 63K).

Retail Sales increased by 0.6% in February, surpassing forecasts of 0.5% and rebounding from a revised -0.1% decline in January (previously -0.2%).

In Canada, the S&P Global Manufacturing PMI fell to 50 in March, down from 51 in February, signaling a stagnation in manufacturing sector performance.

On the monetary policy front, St. Louis Fed President Alberto Musalem said US monetary policy is “well positioned,” adding that holding interest rates steady is likely appropriate for some time.

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

Vishal Chaturvedi

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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