Dollar Strengthens Against Loonie as Oil Prices Decline and Fed Keeps Hawkish Stance

The U.S. dollar has been gaining strength against the Canadian dollar, and this trend is expected to continue due to two key factors.

Firstly, the recent decline in oil prices has weakened the Canadian dollar's commodity-currency support. On Tuesday, WTI crude fell to a more than two-week low as market expectations rose that diplomatic channels between the United States and Iran could help de-escalate regional tensions. This has led to a marked decline in the previously accumulated risk premium on oil supplies.

Secondly, the Federal Reserve's hawkish stance has helped maintain the U.S. dollar's interest-rate advantage. The Fed recently raised its policy rate by 25 basis points and signaled that further hikes could follow within the year.

The combination of these two factors is driving up the USD/CAD pair, with it trading near 1.4080 in Wednesday's Asian session. This level is approaching the high reached on July 29, the highest level since then. If oil prices weaken further and the U.S. dollar remains strong, the pair could test its previous highs.