Canadian Dollar strengthens amid rising oil prices driven by unrest in the Middle East

USD/CAD Pulls Back Amid Stronger Canadian Dollar and Oil Rally

The USD/CAD currency pair has retreated from its previous gains, hovering close to 1.3720 during Thursday’s Asian trading session. This decline is attributed to the Canadian Dollar’s (CAD) renewed strength, which has been buoyed by a rebound in oil prices. The surge in oil comes after recent attacks on vital Middle Eastern energy infrastructure, intensifying fears of potential disruptions to the global oil and gas supply chain.

Recent geopolitical tensions escalated as Iran fired missiles at a Qatari facility that houses the world’s largest LNG export operation. This action followed an Israeli strike on Iran’s South Pars gas field. Former US President Donald Trump acknowledged prior knowledge of the Israeli operation and called for restraint to prevent further assaults on Iran’s energy sector.

The Bank of Canada (BoC) opted to maintain its policy rate at 2.25% on Wednesday, aligning with market expectations. However, the central bank’s accompanying statement adopted a more cautious tone, highlighting subdued economic growth prospects and the threat of rising inflation. Policymakers observed that recent economic indicators have underperformed, with risks increasingly skewed toward slower expansion. They also cautioned that elevated gasoline prices and persistent instability in the Middle East could drive inflation higher in the short term.

During a press briefing, Governor Tiff Macklem stressed that the economic fallout from the Iran conflict would largely depend on how long the tensions persist. He reiterated that the BoC will assess policy decisions on a meeting-by-meeting basis and warned that a drawn-out conflict could reshape the country’s growth dynamics.

On the US side, the Federal Reserve kept its interest rates unchanged at 3.50%–3.75% during its March meeting. Fed Chair Jerome Powell remarked that while inflation is projected to moderate over time, the pace of improvement may be slower than previously forecast. He also noted that the recent spike in oil prices, driven by the Iran conflict, is likely to put upward pressure on inflation in the near future.