USD/CAD tumbles to near 1.4100 as US Dollar nosedives on US recession risks
- USD/CAD dives to near 1.4100 as the US Dollar faces a bloodbath.
- Trump’s tariffs have fuelled risks of a US economic recession
- Investors await the US ISM Services PMI and the NFP data for March.
The USD/CAD pair faces a sharp sell-off and slides to near 1.4100 during European trading hours on Thursday. The Loonie pair weakens as the US Dollar (USD) nosedives after the release of the reciprocal tariff plan by United States (US) President Donald Trump on Wednesday.
The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, is down over 2% to near 101.30.
Investors have dumped the US Dollar as they have become increasingly confident that Trump's tariffs will be unfavorable for the US economy in the near term.the Market experts believe that worse-than-expected tariffs announced by Trump have exposed the US economy to a recession. Trump’s protectionist policies are expected to be inflationary for the US economy. Such a scenario will diminish the purchasing power of households, potentially weighing on demand for durable goods.
Going forward, the next trigger for the US Dollar will be the US Nonfarm Payrolls (NFP) data for March, which will be released on Friday. In Thursday’s session, investors will focus on the ISM Services Purchasing Managers’ Index (PMI) data for March, which will be published at 14:00 GMT. The Services PMI is estimated to have grown at a slower pace to 53.0 from 53.5 in February.
Meanwhile, the Canadian Dollar (CAD) underperforms its peers even though Donald Trump has exempted Canada and Mexico from 10% baseline tariffs that are applicable across all trading partners. The 10% tariff would take effect only when the original 25% duties Trump slapped on Canadian and Mexican imports are terminated or suspended.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
