The Canadian dollar fell to an eight-week low against its U.S. counterpart on Wednesday as escalating global trade tensions and renewed conflict in the Middle East weighed on investor sentiment.
The loonie traded 0.4% lower at 1.3899 per U.S. dollar, or 71.95 U.S. cents, marking its weakest level since April 7.
Middle East Tensions Hit Sentiment
Hostilities in the Gulf intensified again after Iranian attacks on Kuwait damaged its airport and injured dozens of people.
At the same time, the U.S. military carried out strikes near the Strait of Hormuz, while diplomatic efforts to end the war showed little sign of progress.
New Tariff Threats Add Pressure
The Trump administration has proposed new tariffs of up to 12.5% on imports from 60 economies, including Canada.
Washington said the measures were based on claims that the countries had failed to curb trade in goods made with forced labor, an allegation rejected by U.S. trading partners.
Two U.S. Shocks Weigh On Currencies
Marc Chandler, chief market strategist at Bannockburn Global Forex, said markets are dealing with the intensification of two U.S.-driven shocks.
He noted that currencies broadly came under pressure as investors reacted to the combined impact of trade risks and Middle East instability.
U.S. Dollar Gains Broadly
The U.S. dollar rose against a basket of major currencies as risk appetite weakened.
Stocks on Wall Street also declined, reflecting a more defensive market tone as investors moved away from risk-sensitive assets.
Oil Rises But Loonie Still Falls
Oil prices moved higher, which would normally offer support to the Canadian dollar because crude is one of Canada’s major exports.
The U.S. price of oil rose 2.6% to 96.14 dollars a barrel, but the gain was not enough to offset broader pressure from the stronger U.S. dollar and weaker investor sentiment.
GDP Data Had Already Hurt Confidence
Chandler said recent Canadian GDP data had already put the Canadian dollar on thin ice.
Data released Friday showed that Canada’s economy contracted at an annualized rate of 0.1% in the first quarter, following a downwardly revised 1% contraction in the previous quarter.
Technical Recession Concerns Remain
The back-to-back quarterly contractions have raised concerns about Canada’s economic momentum.
Although some economists have cautioned against reading too much into a technical recession label, the data has added pressure to the loonie and reinforced worries about a widening growth gap with the United States.
Services Sector Expands Modestly
Canada’s services economy expanded at a modest pace in May, according to S&P Global’s Canada services PMI data.
The report showed that the Middle East conflict increased economic uncertainty, while higher fuel prices contributed to the fastest rise in operating costs in four years.
Higher Costs Add To Business Pressure
The rise in operating costs adds another challenge for Canadian businesses already facing weaker growth, trade uncertainty and elevated input prices.
For currency markets, the data reinforced the view that Canada’s economy remains vulnerable at a time when external shocks are intensifying.
Bond Yields Move Higher
Canadian bond yields rose across the curve, following moves in U.S. Treasuries.
The 10-year Canadian yield increased 2.1 basis points to 3.436%, reflecting broader pressure in North American bond markets.
Loonie Lacks A Clear Catalyst
The Canadian dollar remains under pressure from a mix of weak domestic data, stronger U.S. dollar demand, trade uncertainty and geopolitical risk.
Even higher oil prices were unable to lift the currency, suggesting that investors are currently more focused on global risk aversion and Canada’s fragile growth backdrop than on commodity support.
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