Canadian dollar under pressure, US dollar remains dominant in the forex market

The strength of the US dollar is becoming the main driver of the global currency market, with the Canadian dollar bearing the brunt. Although Federal Reserve officials issued cautious comments on Tuesday and US economic data showed signs of weakness, the dollar still demonstrates strong resilience, continuing to exert downward pressure on the CAD.

The US dollar remains resilient, putting double pressure on the CAD

During Tuesday’s trading, the USD/CAD exchange rate continued to rise, approaching the 1.3780 level. Meanwhile, the US Dollar Index (DXY), which measures the dollar against major global currencies, touched a daily low of 98.16 but remained around 98.57, indicating that the dollar’s dominance remains intact.

This strong position continues to pressure the Canadian dollar. Even as US economic activity shows signs of slowing, market risk aversion demand for the dollar supports its strength. The CAD faces a dual challenge—on one side, dollar appreciation pressure; on the other, insufficient domestic fundamentals to support its value.

US economy slows but dollar support persists

According to the latest data from S&P Global, US economic growth momentum is indeed slowing. The December services PMI fell to 52.5 from 54.1 in November, marking the slowest expansion in nearly eight months. The composite PMI for manufacturing and services also declined to 52.7 from 54.2 the previous month.

Particularly notable is that new order growth hit a near 20-month low, reflecting a decline in business demand. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that although business activity is still expanding, clear signs of economic pressure are emerging.

However, the slowdown alone is not enough to reverse the dollar’s upward trend. On the contrary, many companies remain optimistic about the next phase of the economy, expecting demand to gradually recover as interest rates fall and government support policies take effect. This divergence in expectations supports the dollar’s appeal as a safe-haven asset.

Federal Reserve policy signals and future outlook

On the policy front, Federal Reserve officials’ tone indicates cautious but somewhat dovish signals. Richmond Fed President Thomas Barkin emphasized that policymakers need to pay attention to both inflation and employment data, stating that current interest rates are in a neutral zone, and future policy adjustments should proceed cautiously.

Fed Board Member Stephen M. M. Miran further indicated that upcoming economic data are expected to continue supporting market expectations for rate cuts. He warned that overly tight policies could hinder economic growth but remains optimistic about the overall economic outlook. These policy signals set the tone for the dollar’s future performance—expectations of easing policies may support the dollar.

Oil prices and CAD correlation logic

Another challenge for the CAD comes from the energy markets. West Texas Intermediate (WTI) crude oil is currently hovering around $58.00, unable to sustain the rally from the previous trading day. Investors are weighing the potential impact of US military actions against Venezuela and the outlook for Venezuelan oil exports.

As Canada is a major oil exporter, falling oil prices directly pressure the CAD. In a relatively sparse economic calendar, the subdued oil prices become a key factor suppressing the CAD, further limiting its support in the forex market.

Key data next week could be a turning point

Looking ahead, markets are closely watching the upcoming US Non-Farm Payrolls (NFP) report and Canadian employment data, both scheduled for this Friday. These key economic indicators are expected to significantly influence the policy expectations of the Federal Reserve and the Bank of Canada over the coming months.

If US labor market data outperform expectations, it could further support the dollar and intensify pressure on the CAD. Conversely, weak data could give the CAD a rebound opportunity. Traders should pay close attention to these indicators, as they may serve as critical catalysts for changing the current softening trend of the CAD.