USD/CAD extends recovery to near 1.3670 as US Dollar gains ground

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USD/CAD moves higher to near 1.3670 as the US Dollar gains on hopes of the US-EU trade deal.
Trump’s tariffs appear to be less severe than they initially seemed.
Monthly Canadian Retail Sales declined by 1.1% in May, as expected.

The USD/CAD pair trades 0.25% higher to near 1.3670 at the start of the European trading session on Friday. The Loonie pair rises as the US Dollar (USD) gains ground on hopes that the impact of the tariff policy introduced by United States (US) President Donald Trump since his return to the White House will be limited on the economy.

Investors become increasingly confident of a limited impact of Trump’s tariff policy as Washington is closing deals with his major trading partners. Recent announcement of a tariff deal between the US and Japan, and rising hopes of a US-EU trade pact, have bolstered investors’ confidence that US Inc. will not face raw material concerns.

The US Dollar had been on a rough road in the past few months as market experts warned that the Trump-led tariff policy would lead to supply chain concerns and would increase inflationary pressures, given that the burden of a higher duty would be borne by importers.

For fresh cues on the impact of tariffs on inflation, investors await the Federal Reserve (Fed) monetary policy announcement next week. Fed officials have stated lately that the impact of tariffs has started feeding into prices. According to the CME FedWatch tool, the Fed is certain to leave interest rates unchanged in the range of 4.25%-4.50%.

Meanwhile, an expected decline in the Canada Retail Sales data for May has weighed on the Canadian Dollar (CAD). On Thursday, Statistics Canada reported that Retail Sales, a key measure of consumer spending, fell by 1.1%, as expected. The consumer spending measure rose by 0..3% in April.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.