USD/CAD extends losses, nearing 1.3700 amid optimism about Iran's war

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USD/CAD hits three-week lows at 1.3713 and is nealy 1% down on the week.
Rising hopes of a new round of US-Iran peace talks are weighing on the US Dollar.
A new rift between Trump and Fed Chairman Jerome Powell adds pressure on the Greenback.

The US Dollar (USD) extends losses against the Canadian Dollar (CAD) for the fourth consecutive day on Thursday, amid broad-based weakness in the USD as investors raise their bets on a resolution of the Middle East conflict. The pair has depreciated by nearly 1% so far this week, hitting fresh three-week lows at 1.3713 before recovering above 1.3720 at the time of writing.

US President Donald Trump boosted investors' optimism on Wednesday, affirming that the US and Iran are holding “productive and ongoing” discussions and showing confidence that the peace talks might resume in the coming days. This news has prompted investors to pare back their holdings of safe-haven US Dollars and move towards riskier assets.

Apart from that, the US president has reiterated his threat to oust Federal Reserve (Fed) Chair Jerome Powell if he refuses to leave the central bank at the end of his term in May. This brings back concerns about the central bank's independence and undermines confidence in the US Dollar as a reserve currency.

Powell’s term as Fed chief expires on May 15, but his tenure on the Board of Governors extends until January 2028, and he said that he will stay in charge until the criminal investigation for an alleged fraud ends. The investigation might delay the Senate’s confirmation of Powell’s successor, Kevin Warsh, for several weeks, allowing Powell to remain in charge.

Regarding macroeconomics, Canada’s calendar is light this week. In the US, the Philadelphia Fed Manufacturing Survey from April, Industrial Production data from March, and the speeches of the New York Fed President John Williams and Board member Stephen Miran are likely to provide additional guidance for US Dollar crosses later on Thursday.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.