Canadian Dollar Hits 12-Day Low as Stronger U.S. Dollar Outweighs Oil Price Surge

The Canadian dollar fell on Monday, approaching a 12-day low against a broadly stronger U.S. dollar. The downward pressure came as investor expectations for a U.S. Federal Reserve interest rate hike intensified, overpowering the traditional support the loonie receives from rising oil prices.

Greenback Strength Dominates

The USD/CAD pair traded at approximately C$1.392, with the Canadian dollar down about 0.3% on the day, according to market data. During the session, it touched C$1.3929, its weakest point in 12 days.

The U.S. dollar's strength was the primary driver, with the U.S. Dollar Index advancing nearly 0.4%. Markets are pricing in a roughly 90% probability of a significant interest rate increase from the Federal Reserve this week, a move aimed at taming persistent inflation. The greenback also benefited from safe-haven flows amid geopolitical tensions and a sell-off in global technology stocks.

Oil's Muted Impact

Ordinarily, a surge in oil prices would bolster the Canadian dollar, as Canada is a major global crude oil exporter. Brent crude prices climbed above $108 per barrel on Monday, fueled by concerns over potential supply disruptions in the Middle East.

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However, the rally in energy prices also stoked broader inflation fears. This ironically reinforced expectations for more aggressive monetary tightening from the Fed, further strengthening the U.S. dollar and neutralizing the positive impact of higher oil revenue for Canada.

Canadian Inflation Holds Steady

Domestic economic data provided little support for the loonie. Canada's Consumer Price Index (CPI) for August was in line with market expectations, showing a 3.0% annual increase, unchanged from July. Key details from the report include:

• Month-over-month CPI: -0.1%
• Core inflation (median/trimmed mean): Stable at 2.0% and 1.9%, respectively.
• Gasoline prices: A primary contributor, up 22.8% year-over-year.

While headline inflation remains above the Bank of Canada's 2% target, the lack of acceleration in core price pressures meant the data did not provide a catalyst for a more hawkish central bank stance.