Dollar extends post-Fed gains as yields climb

CAD: Wider rate gap drives loonie’s nine-day slide

The Canadian dollar’s nine-session decline has pushed USD/CAD above 1.41, confirming that the post-Fed shift in rate expectations has overtaken earlier arguments for loonie strength. US two-year yields rose nearly 14 basis points this week, more than three times the increase in Canadian yields, widening the spread to a 2026-high of 152 basis points. Strong US activity data reinforced expectations for further Fed tightening, while the Canadian front end mainly followed the global bond selloff. The resulting carry disadvantage has left the loonie vulnerable even as markets price a growing chance of Bank of Canada hikes.

The oil shock has offered little support, as the latest move is feeding inflation concerns, higher global yields and tighter financial conditions instead. That leaves the Bank of Canada facing a mix of weaker growth and renewed price pressure, made worse by the OECD’s lower Canadian growth forecasts and higher inflation projections. Expectations for October and December hikes are building, but markets doubt the BoC can tighten quickly enough to prevent the rate gap with the Fed from remaining wide.

The path towards 1.42 looks clear after breaking above the August high and establishing 1.40 as support, although nine consecutive gains leave the pair exposed to a pullback if the bond selloff or geopolitical risk eases.

Next week’s September 29 US import restrictions on Canadian goods could add another domestic drag, while any progress in US-Canada talks or negotiations over the Strait of Hormuz would cap the current move. The broader direction will continue to depend on whether energy prices keep pushing inflation and yields higher, and whether incoming Canadian data gives the BoC enough cover to validate the tightening now priced into the curve.

EUR: Resilient eurozone, relentless US dollar

EUR/USD is heading for its worst month since June, when Fed Chair Kevin Warsh delivered his hawkish debut. The pair is down ~2% month-to-date and hovering near two-month lows.

This week may have served as a reminder that meaningful progress towards ending the Middle East conflict remains elusive, in turn helping validate the Fed’s hawkish stance as a key driver of FX markets.

Elsewhere, eurozone sentiment indicators continue to surprise to the upside, highlighting economic resilience despite geopolitical tensions and domestic political uncertainty. Alongside the S&P PMIs earlier this week, yesterday’s German Ifo survey added to evidence of solid underlying momentum.

The headline Ifo business climate Index rose for a fifth consecutive month, to 89.9 from 88.8 (est. 89.0). The current assessment component increased to 89.5 from 88.5 (est. 89.0), while expectations climbed to 90.4 from 89.1 (est. 89.3).

Much of the strength likely reflects the government’s sizeable fiscal stimulus on defence and infrastructure, which is finally starting to filter through to the economy and offset some of the drag from higher energy prices.

The data did little to strengthen the case for an ECB hike in October. The Bank has already tightened twice and may be reluctant to push rates higher at the expense of growth. Nonetheless, the figures reinforce the ECB’s hawkish bias and its willingness to tighten further should oil prices remain elevated.

That leaves the focus squarely on the Fed as the main short-term driver of EUR/USD. Until the Fed path becomes clearer, we would expect consolidation around 1.14.

MXN: Carry cracks under Fed pressure

The Mexican peso was one of the week’s worst-performing major currencies as the Fed’s hawkish shift weakened the carry support behind one of 2026’s strongest trades. USD/MXN rose almost 2.5% to around 17.66, while the Mexico-US two-year yield spread narrowed toward 300 basis points as US yields repriced more aggressively. After a long period of crowded peso positioning, the yield compression sent longs looking for coverage, particularly with one-month implied volatility reaching a cycle high. The break above 17.50 suggests investors are questioning whether the remaining yield advantage is enough compensation for rising policy and geopolitical risks.

Banxico’s decision to hold at 6.50% offered limited relief, but dropping its explicit guidance for rates to remain unchanged was a hawkish signal. The board has given itself room to tighten if peso weakness, higher energy costs or the Fed’s policy path threaten the inflation outlook. A possible US diesel export ban would sharpen that dilemma by raising Mexico’s import costs while adding pressure to domestic prices and economic activity. Banxico can defend the carry advantage, but doing so would come with a heavier growth cost.

USD/MXN is now testing the 17.7 to 17.8 area, with a sustained break potentially bringing 18.00 into view. The clearest catalyst for a reversal would be progress on a US-Mexico trade agreement, although the postponement of the next bilateral negotiating round removes an immediate source of support. Next week, traders will watch for a new date for those talks, clarification from Banxico and any movement on US diesel restrictions. Without a softer US rates backdrop or a credible trade breakthrough, the peso’s carry cushion is likely to remain under pressure.

Market snapshot

Table: Currency trends, trading ranges & technical indicators

Key global risk events

Calendar: September 21 – 25

All times are in EST

Have a question? [email protected]

*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.