USD/CAD corrects to near 1.3640 as Trump announces new tariff rates
- USD/CAD falls sharply to near 1.3640 as Trump unveils fresh batch of tariffs for 14 nations.
- The imposition of 25% tariffs on imports from Japan has weighed on the US Dollar.
- Investors await FOMC minutes and Canadian labor market data.
The USD/CAD pair retraces to near 1.3640 during European trading hours on Tuesday. The Loonie pair corrects as the US Dollar (USD) gives up half of tariff-inspired gains made on Monday. The United States (US) currency faces selling pressure after President Donald Trump unveiled new additional duty rates for nations that fail to strike a deal during the 90-day tariff pause.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades lower around 97.35.
On Monday, Trump announces tariffs on 14 countries, out of which Japan and South Korea were notable, being leading trading partners of Washington. The White House imposed 25% tariffs on both nations, while Washington was negotiating with Tokyo consistently from past few weeks.
The resumption of global trade tensions has undermined the US Dollar, assuming that the burden of higher tariffs will be borne by US importers who would be forced to transfer to end consumers.
Meanwhile, investors await the release of the Federl Open Market Committee (FOMC) minutes of the June 14-18 policy meeting, which is scheduled for Wednesday. The FOMC minutes will provide a detailed explanation about reasons, which forced Federal Reserve (Fed) officials to hold interest rates in the range of 4.25%-4.50% for the fourth meeting in a row.
In Canada, investors await the labor market data for June, which will be released on Friday. Investors will pay close attention to the Canadian employment data as it will influence market expectations for the Bank of Canada’s (BoC) monetary policy outlook. The labor market report is expected to show that the employment activity remained subdued. The Unemployment Rate is seen accelerating to 7.1% from 7% in May.
Signs of further weakness in labor market conditions would prompt the BoC to cut interest rates further.
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.