Canadian Dollar Weakens as Hawkish Fed Outlook Overshadows Strong GDP Data

The Canadian dollar weakened against a surging U.S. dollar on Friday, heading for its most significant weekly drop in over two months. The currency's decline was driven by hawkish commentary from the U.S. Federal Reserve, which overshadowed a robust rebound in Canada's domestic economic growth.

By Friday afternoon, the loonie was trading at approximately C$1.3900 per U.S. dollar, or 71.94 U.S. cents, marking a 0.3% decline for the session. The currency had earlier touched C$1.3908, its weakest point in nine days, according to Investing.com data.

Hawkish Fed Remarks Drive Greenback

The primary pressure on the Canadian dollar stemmed from its U.S. counterpart. Speaking at the Jackson Hole economic symposium, Federal Reserve Chair Kevin Warsh stated the central bank would have "more work to do" if inflation does not show convincing progress toward its 2% target.

These remarks prompted a significant repricing in interest rate expectations. According to the source, markets raised the probability of a 25-basis-point Federal Reserve rate hike in September to 57.5%, a sharp increase from 35% previously. The U.S. Dollar Index, which measures the greenback against a basket of currencies, rose about 0.6% to 99.69 in response.

Strong GDP Data Fails to Lift Loonie

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Earlier in the day, the loonie found little support from otherwise strong domestic economic data. Canada’s economy grew at a 3.3% annualized pace in the second quarter, a sharp acceleration from the first quarter and its strongest expansion since 2023. The figure also surpassed the Bank of Canada’s own forecast of 2.5%.

However, investors largely discounted the positive report because the data predates the latest escalation in Canada-U.S. trade tensions. Market focus has shifted to the potential impact of new U.S. tariffs and Canadian retaliatory measures on economic growth in the second half of the year, following the breakdown of trade talks last week.

Widening Policy Divergence

The differing outlooks for the two central banks are creating a policy divergence that weighs on the Canadian dollar. While markets are now pricing in a greater chance of a U.S. rate hike, the Bank of Canada is widely expected to remain on hold.

A Reuters poll of 35 economists indicated the Bank of Canada is forecast to keep its benchmark overnight rate at 2.25% at its September 2 meeting and maintain that level through at least the third quarter of 2027. This divergence limits the upward potential for Canadian bond yields, leaving the loonie more exposed to U.S. dollar strength.