Canadian Dollar Gives Up Gains as Geopolitical Risks and Fed Outlook Lift US Dollar

As geopolitical uncertainty strengthens demand for the greenback, the Canadian Dollar surrendered much of its earlier gains on Friday as investors shifted back toward the US Dollar amid renewed geopolitical tensions in the Middle East and expectations that US interest rates could remain higher for longer.


Fresh uncertainty surrounding negotiations between the United States and Iran revived demand for safe-haven assets, helping the US Dollar recover after recent weakness. Markets were also unsettled by reports of new security incidents involving commercial shipping near the Strait of Hormuz, highlighting that regional risks remain elevated despite ongoing diplomatic efforts.


Fed outlook continues to support the Dollar

The US Dollar also found support from expectations that the Federal Reserve could maintain a restrictive monetary policy if inflation proves more persistent than anticipated. While recent inflation data suggested that underlying price pressures remain relatively contained, broader inflation trends continue to leave the door open for another interest rate increase later this year.


A Federal Reserve official reinforced that cautious stance by indicating that one additional rate hike remains possible in 2026, while stressing continued concerns over inflation, particularly within the services sector.


Falling oil prices weigh on the Canadian Dollar

Lower crude oil prices added further pressure to the Canadian Dollar, as easing disruptions to shipping through the Strait of Hormuz reduced concerns over global energy supplies.


With Canada being one of the world’s largest oil exporters, weaker crude prices typically reduce support for the country’s currency. Oil prices have fallen sharply during the week, limiting the Canadian Dollar’s ability to benefit from broader market movements.


Markets shift focus to key economic data

Investors are now turning their attention to next week’s major economic releases, including Canada’s GDP report and the latest US employment data. These reports are expected to provide fresh insight into the health of both economies and could play an important role in shaping expectations for future monetary policy, while ongoing geopolitical developments remain a key driver of currency markets.