The US Dollar had a strong uphill battle ahead of it as it looked to claw back from a three-day decline. Based on recent trading data, we can see that the US Dollar Index (DXY) is currently trading around a three-year low of 99.00. That drop is powered by a stellar performance, including record growth, in spite of a trade war with China. As the USD/CAD currency pair shot up near 1.3900 during North American trading hours on Tuesday, this increase is a testament to a powerful change in market fundamentals driven by the latest economic data.
Yesterday, Statistics Canada released new data showing that inflationary pressures have cooled down— especially in March. The headline Consumer Price Index (CPI) posted a slight softening at 2.3%, down from 2.6% last month. The drop in inflation creates a window for more dovish monetary policy. This sea change would have important implications for both the Canadian economy and the loonie.
Market participants anxious for clarity look to the Bank of Canada’s (BoC) monetary policy meeting on Wednesday. Analysts overwhelmingly forecast that the central bank will keep interest rates at 2.75%. This decision is expected to bring significant short-term stability to the Canadian dollar during a time of continued economic uncertainty.
The US Dollar has come on serious pressure after a dramatic sell-off the last few trading days. In addition to the costly tariff impacts, the continued trade war between the United States and China fills everyone with dread. They’re afraid it’ll be bad for the domestic economy. As experts have been pointing out, we cannot easily replace Chinese goods. Perhaps the most important question is whether this will create major, unavoidable disruptions down the line in the supply chain. These four forces combined have battered the Greenback. You can witness this drop in its recent performance compared to other key currencies, as illustrated on Figure 4.
The DXY measures the value of the US Dollar against a basket of six key currencies. What this all points to is that the Greenback’s struggles are merely symptomatic of a major trend driven by our shifting international trade relations. With trade tensions increasing by the second, whether the US Dollar can maintain such dominance over the coming global shifts remains unclear.