Loonie Slips Amid Oil Surge and Rate Worries Ahead of Fed Decision

The Canadian dollar weakened on Tuesday as oil prices surged past $107 a barrel, fueled by escalating Middle East tensions. Despite the traditional support for the loonie from higher crude prices, Canada's major oil exporter status was offset by concerns of inflation and interest rates.

Brent crude climbed above $107 a barrel, but the oil shock also raised expectations for higher U.S. interest rates. The U.S. 10-year Treasury yield has climbed above 5%, increasing the dollar's yield advantage over the Canadian currency.

The Federal Reserve's policy decision on Wednesday is now heavily focused on by investors, with a high probability of a rate increase priced in. Any signal that policymakers expect inflation to remain persistent could further support the U.S. dollar and pressure the Canadian currency.