USD/CAD jumps to near 1.4370 as Fed is in no hurry to cut interest rates
- USD/CAD climbs to near 1.4370 as the US Dollar strengthens in the aftermath of the Fed’s monetary policy.
- The Fed left interest rates steady and maintained its forecast of two interest rate cuts this year.
- Analysts at BofA expect the BoC to cut interest rates again by 25 bps next month.
The USD/CAD pair gains sharply to near 1.4370 in European trading hours on Thursday. The Loonie pair moves higher as the US Dollar (USD) strengthens after the Federal Reserve (Fed) expressed that it is in no hurry to cut interest rates. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps to near 104.00.
On Wednesday, the Fed kept interest rates steady in the range of 4.25%-4.50% and stuck with its two interest rate cut forecasts amid “unusually elevated” uncertainty over the United States (US) economic outlook due to President Donald Trump’s economic policies.
Fed Chair Jerome Powell warned in the press conference that tariff policies by Donald Trump tend to bring “growth down and inflation up”. This also led Fed officials to revise their core Personal Consumption Expenditure Price Index (PCE) forecast for this year to higher 2.8%, up from 2.5% projected in the December meeting. The central bank revised GDP growth for this year lower to 1.7% from the prior forecast 2.1%.
Going forward, the major trigger for the global market will be Trump’s tariff agenda. Trump is poised to introduce reciprocal tariffs on April 2. Market participants expect Trump’s tariff policies would lead to a slow down in the economic growth globally.
Though investors have underpinned the Canadian Dollar (CAD) against the US Dollar, it is performing strongly against other peers even though the Bank of Canada (BoC) is expected to cut interest rates again in the April policy meeting.
Analysts at Bank of America (BofA) expect the BoC to cut interest rates by 25 basis points (bps) to 2.50% in April but cautioned that the decision will be influenced by US "reciprocal tariffs" and the March Consumer Price Index (CPI) data.
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.