Canadian Dollar Weakens as Falling Oil Prices and a Rebounding US Dollar Weigh on Sentiment Amid Fed Expectations and Middle East Tensions

USD/CAD edges higher as the US Dollar stages a solid rebound from its lowest level since June 17. Rising tensions between the United States and Iran continue to fuel inflation concerns and reinforce expectations that the Federal Reserve could maintain a hawkish stance, providing support for the Greenback. Meanwhile, worries over potential supply disruptions help keep oil prices elevated, lending support to the Canadian Dollar and limiting further gains in the currency pair.

The USD/CAD pair moved slightly higher during Friday’s Asian trading session, ending a three-day decline that had pushed the pair to its lowest level since June 17. The pair remains above the key 1.4000 level, although buying momentum appears limited.

The US Dollar found modest support as markets continued to price in the possibility of at least one additional interest rate increase from the Federal Reserve. While recent US economic data painted a mixed picture—showing slower economic growth in the second quarter and easing inflation pressures through the Personal Consumption Expenditures (PCE) Price Index—investors remain cautious about ruling out further monetary tightening.

Despite signs of cooling inflation, fluctuating oil prices continue to raise concerns about price stability, potentially encouraging the Fed to maintain a restrictive policy stance. At the same time, escalating tensions between the United States and Iran, along with fears of a wider Middle East conflict, have boosted demand for the safe-haven US Dollar. Most recently, the US military confirmed a major wave of strikes against Iranian targets in response to missile attacks on American forces earlier in the week.

However, gains in USD/CAD may remain constrained by support for the Canadian Dollar. Iran’s rejection of an Omani proposal regarding partial control of the Strait of Hormuz, combined with continued attacks by Yemen’s Houthi forces in key shipping routes such as the Bab al-Mandab Strait, the Red Sea, and the Gulf of Aden, has intensified concerns over potential disruptions to global energy supplies. These risks have helped support crude oil prices, which in turn provide backing for the oil-sensitive Canadian Dollar and may limit further upside in the USD/CAD pair.