• USD/CAD trades near two-month highs around 1.3756 as the US Dollar regains strength.
• Safe-haven demand supports the Greenback amid escalating Middle East tensions.
• Softer US PMI data signals slowing growth, but fails to weaken the Dollar.

The Canadian Dollar (CAD) trades under pressure against the US Dollar (USD) on Tuesday, as the Greenback edges higher and trims part of the previous day’s decline. At the time of writing, USD/CAD is trading around 1.3765, hovering near fresh two-month highs.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is hovering around 99.39, just below the intraday high of 99.50 reached during the European session.

The USD came under brief pressure following the release of the preliminary S&P Global Purchasing Managers Index (PMI) data. However, the move proved short-lived as heightened geopolitical risks surrounding the US-Israel war with Iran continued to underpin demand for the Greenback.

The Composite PMI fell to 51.4 from 51.9, while the Services PMI dropped to 51.1 from 51.7, with both marking an 11-month low. In contrast, manufacturing remained relatively resilient, with the PMI rising to 52.4 from 51.6.

This was the first PMI release since the Middle East conflict escalated, and it suggests that the economic impact is starting to show. Growth is slowing, while costs are rising, mainly due to higher energy prices and supply disruptions.

Despite the softer growth signals, the US Dollar continues to find support from safe-haven flows, as investors remain cautious amid ongoing geopolitical uncertainty. Rising Oil prices have also reinforced inflation concerns, raising expectations that the Federal Reserve will keep interest rates higher for longer, further underpinning the Greenback and lifting Treasury yields.

In the latest developments, Gulf states such as Saudi Arabia and the United Arab Emirates are weighing military options against Iran, raising the risk of a broader regional conflict. Although both countries remain cautious and have set a high threshold for direct involvement, the Wall Street Journal reported.

Meanwhile, elevated Crude Oil prices offer some underlying support to the Canadian Dollar, given Canada’s status as a major oil exporter. However, this support has been limited, as broader US Dollar strength and risk aversion continue to dominate price action.

Looking ahead this week, a relatively light US economic calendar and the absence of major data from Canada leave USD/CAD driven primarily by US Dollar dynamics and evolving geopolitical developments.