Canadian Dollar Hits 9-Day Low as Hawkish Fed Bets and Trade Tensions Mount

The Canadian dollar weakened on Friday, poised for its largest weekly decline in over two months, as a stronger U.S. dollar and ongoing trade frictions with the United States outweighed a significant rebound in Canada's economic growth.

The currency, known as the loonie, fell approximately 0.3% to trade around 1.3900 per U.S. dollar (about 71.94 U.S. cents). During the session, it touched 1.3908, its weakest level in nine days, as investors increased bets on a potential U.S. interest rate hike in September.

Diverging Central Bank Outlooks

The primary pressure on the Canadian dollar stemmed from a surging greenback. The U.S. Dollar Index climbed roughly 0.6% to 99.69, its highest since August 17. The move followed hawkish remarks from former Federal Reserve Governor Kevin Warsh at the Jackson Hole economic symposium, who stated the Fed would need to take further action if inflation does not show convincing progress toward its 2% target.

Following these comments, market pricing for a 25-basis-point Fed rate hike in September jumped from 35% to approximately 57.5%. This contrasts sharply with the outlook for the Bank of Canada (BoC). A recent Reuters poll of 35 economists indicated the BoC is expected to hold its overnight rate at 2.25% at its September 2 meeting and maintain that level until at least the third quarter of 2027, largely due to economic uncertainty from the trade disputes.

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Strong GDP Data Overlooked

The loonie's decline came despite data showing the Canadian economy expanded at an annualized rate of 3.3% in the second quarter. This marked the strongest quarterly performance since 2023 and surpassed the Bank of Canada's own forecast of 2.5%.

However, the positive economic figures provided little support for the currency. Investors appeared to discount the backward-looking data, focusing instead on the potential impact of new U.S. tariffs and Canadian countermeasures on growth in the second half of the year after trade negotiations broke down last week.