USD/CAD slumps to near 1.4400 as investors await Trump’s tariffs plan for Canada
- USD/CAD falls sharply to near 1.4400 as investors look for US President Trump’s tariff plane for Canada, Mexico and China.
- Escalating dovish Fed bets have weighed on the US Dollar.
- Investors await the US ISM Manufacturing PMI, which will be published at 15:00 GMT.
The USD/CAD pair slides to near the key level of 1.4400 in North American trading hours on Monday. The Loonie pair weakens as the US Dollar (USD) underperforms across the board, with investors awaiting United States (US) President Donald Trump’s tariff plan for Canada, Mexico and China.
President Donald Trump is poised to impose tariffs on his North American peers and China on Tuesday as stated in his tweet on Truth.Social on Thursday. Trump said that he will slap 25% tariffs on Canada and Mexico, and additional 10% on China as drugs are still pouring into the economy.
However, US Commerce Secretary Howard Lutnick indicated over the weekend that tariffs by President Donald Trump on Canada and Mexico could be lower than 25%. Such a scenario will be favorable for the Canadian Dollar (CAD).
Erstwhile, escalating Federal Reserve (Fed) dovish bets have also weighed on the US Dollar. According to the CME FedWatch tool, the probability for the Fed to cut interest rates in the June meeting has increased to 74% from 63% a week ago. Fed dovish bets swelled due to a decline in the US Personal Spending data for January.
This week, investors will focus a slew of US economic and the Canadian labor market data.
In today’s session, investors will focus on the US ISM Manufacturing Purchasing Managers’ Index (PMI) data for February, which will be published at 15:00 GMT. The ISM Manufacturing PMI is estimated to have grown at a marginally slower pace to 50.8 from 50.9 in January.
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.