Key Takeaways
- The US dollar fell to a two-week low as yen strength outweighed the support from higher oil prices.
- Rising Treasury yields failed to lift the dollar, highlighting investors’ concern over the US fiscal and policy outlook.
- The Canadian dollar held firm as higher oil prices offset renewed trade tensions with the US.
- EUR/USD remained near 1.16 as investors held back ahead of the US inflation report.
- US inflation data will shape Fed rate expectations and set the direction for global markets.
USD: Dollar slides as energy surge meets Yen strength
The US dollar slipped to its lowest close in two weeks on Tuesday, trading this morning at 98.8. Persistent yen strength pushed the greenback lower early on, before rising oil prices sparked a brief recovery. Brent crude closed near $98 a barrel, sending the ten-year Treasury yield above 4.80%. Yet the dollar quickly gave back those gains.
The contrast with March is notable. Back then, higher oil prices briefly strengthened the dollar by improving the US terms-of-trade outlook. Rising yields have also kept the dollar supported. This time, sharp moves in the yen and a renewed US policy premium have clouded the signal from oil and yields. Investors appear less willing to treat higher Treasury yields as an automatic support to buy the dollar, especially when fiscal and policy uncertainty are also pushing borrowing costs higher.
Markets now price around a 63% chance of a Fed rate increase next week. However, the decision remains far from settled, leaving Friday’s US CPI report as the key test. Stable long-term inflation expectations give the Fed room to wait unless the data surprise to the upside. Meanwhile, Middle East tensions could keep energy prices elevated, although signs of diplomacy would quickly remove part of that support.
DXY’s close below 99.00 leaves the index on a softer footing, with resistance near 99.20 and immediate support around 98.72. Thursday’s producer price report may set the tone ahead of CPI, but payrolls, oil and higher yields have so far failed to deliver a lasting dollar rally. A hot inflation print could revive Fed hike bets and lift DXY back above 99.20. Otherwise, the dollar may remain range-bound as yen strength and the US policy premium limit demand.
CAD: Canadian dollar holds firm despite rising trade tensions
The Canadian dollar held its ground on Tuesday, brushing off a fresh wave of trade friction with the United States. USD/CAD closed at 1.378 as the loonie rebounded after briefly hitting a late-August low. Higher oil prices have provided some support, with WTI crude jumping above $94 a barrel. That energy rally helped cushion the impact on domestic markets, even as Canadian equities logged broad losses.
This currency strength came on the exact day Canada’s counter-tariffs on US goods went into effect. PM Carney pledged to backstop impacted businesses while forging closer trade ties with Europe. However, local exporters are already feeling the heat through canceled orders and surging operational costs. Carney has now called an emergency cabinet meeting in Banff this Thursday to map out targeted economic relief. (More info here on what the new tariffs mean for Canada).
These trade disruptions pose a direct challenge to the Bank of Canada’s recent hawkish stance. Central bankers previously downplayed tariff risks, but last week’s sharp job losses tell a much darker story. Investors are watching wage growth closely to see if slowing inflation will force the bank to pause rate hikes. Any massive spending plan out of Banff could reignite price pressures and complicate monetary policy further.
From a technical perspective, the pair holding the 1.3760 support floor gives buyers a solid anchor for now. A clear break below that line would open the path toward 1.3500 and wipe away the recent trade-conflict premium. Traders are now eyeing key US inflation data and the upcoming Federal Reserve rate decision for the next big push. Above all, any surprise move from President Trump remains the primary wild card for FX markets.
EUR: EUR/USD stuck in neutral
EUR/USD continues to trade cautiously around the 1.16 mark as it awaits a fresh catalyst for more meaningful directional momentum. Friday’s US August CPI release could provide that catalyst, with markets still undecided on the Fed’s next move.
There remains a slight bias toward a rate hike, with roughly 60% priced in. A strong jobs report last week and the recent rebound in oil prices explain the tilt.
The latest escalation in the Middle East has pushed oil prices to their highest levels since late July, with Brent flirting with the $100-per-barrel mark. Yet the euro remains unfazed.
Markets have shifted from pricing an outright oil shock, which weighed on the euro during the earlier stages of the conflict, to focusing on the broader macro backdrop, with rate differentials back in the driver’s seat.
A gradual rise in energy prices is unlikely to materially undermine the euro via terms-of-trade or growth concerns. Nor is it likely to reignite meaningful safe-haven demand for the dollar. Instead, a still-hawkish ECB and firmer Eurozone macro momentum can provide a still relatively constructive backdrop for the single currency, for now.
That said, as argued previously, the market’s hawkish ECB narrative may face a test on Thursday. The bar for delivering additional hawkish surprises looks increasingly difficult to clear, and the euro may face moderate downward pressure.
For now, we expect EUR/USD to remain trapped in a broadly subdued range, with more meaningful volatility likely reserved for Friday’s CPI release.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: September 08 – 11
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*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.
