Fed Hike Expectations Boost US Dollar Amid Ongoing Trade Tensions
The Canadian Dollar retreated on Tuesday as investors bet that the Federal Reserve will raise interest rates in September, boosting the US Dollar's value.
Market expectations of a Fed rate hike are now firmly back on the table following comments from Fed Chair Kevin Warsh, who expressed concerns about inflation remaining above the central bank's 2% target.
The probability of a rate increase at the September 15-16 meeting has risen to around 65%, according to the CME FedWatch Tool. This hawkish repricing supports the US Dollar and pushes US Treasury yields higher, with the 10-year yield rising to its highest level since January 2025.
Meanwhile, trade tensions between the United States and Canada remain a concern, with the two countries imposing tariffs on each other's goods in August. The Bank of Canada is expected to leave interest rates unchanged at 2.25% when it makes its decision on Wednesday, as recent data suggests that underlying inflation is close to the central bank's target.