Canadian Dollar Rallies to One-Week High on Hawkish BoC Inflation Warning

The Canadian dollar strengthened to a more than one-week high against the U.S. dollar on Thursday, extending a recent rally after the Bank of Canada (BoC) signaled that inflation risks are intensifying.

Hawkish Hold from the Central Bank

The Bank of Canada kept its benchmark interest rate unchanged at 2.25% for the seventh consecutive meeting, a move that was widely anticipated by markets. However, the central bank's accompanying commentary struck a hawkish tone.

BoC Governor Tiff Macklem emphasized the upside risks to the inflation outlook, citing high energy prices and the impact of U.S. tariff policies. This rhetoric prompted investors to increase their bets that the central bank will raise borrowing costs in the future to rein in price pressures.

Market Reaction

The Canadian dollar, often called the loonie, gained 0.20% to trade at C$1.3817 per U.S. dollar, or about 72.37 U.S. cents, according to data from Investing.com. The currency's strength on Thursday continued a rebound from a low of C$1.3939 hit on Tuesday, its weakest level since mid-August.

Ad

The move followed a 0.4% gain on Wednesday immediately after the BoC's policy announcement. The currency is also finding support from rising oil prices, a key Canadian export, which adds to the inflation pressures noted by the central bank.

Outlook and Analyst Views

Traders are now weighing the prospect of a narrowing interest rate differential between Canada and the United States, alongside the potential for an easing of trade tensions between the two countries.

A Reuters poll published Thursday showed that analysts expect the Canadian dollar to weaken slightly to 1.39 per U.S. dollar over the next three months. However, the survey indicated a potential recovery to 1.36 within a year if U.S.-Canada trade frictions subside.