Loonie weakens after Fed hike as dollar gains on hawkish outlook

Investing.com -- The Canadian dollar weakened against its U.S. counterpart on Wednesday after the Federal Reserve raised interest rates as expected and signalled another increase before year-end, reinforcing the U.S. dollar’s advantage over the loonie.

At around 2:24 p.m. ET, USD/CAD was trading around C$1.394, putting the Canadian dollar at roughly 71.7 U.S. cents. The pair has risen for a sixth straight session and reached about C$1.3944 during the day, its highest level in roughly a month.

The Fed raised its benchmark rate by 25 basis points to 3.75%-4.00%, its first rate increase since July 2023. Its updated projections showed policymakers expect another hike before the end of 2026, keeping pressure on currencies such as the Canadian dollar.

The Canadian dollar has also been pressured by the recent rise in the U.S. dollar against major currencies. Higher U.S. yields can make dollar-denominated assets more attractive relative to Canadian assets, particularly when expectations for Canadian monetary policy remain comparatively softer.

Oil prices, meanwhile, provided limited support to the commodity-linked currency. Crude prices remained elevated amid concerns over global supply, but recent moves in oil have not been enough to reverse the loonie’s broader decline.

The currency’s weakness follows a run of losses in recent sessions. The loonie’s performance has also reflected shifting expectations for the Bank of Canada’s policy path, alongside movements in global risk appetite and commodity markets.

Canadian markets will now look to the Fed’s decision and comments from policymakers for clues on the direction of U.S. rates. A stronger-than-expected U.S. dollar response could add further pressure on the loonie, while any shift toward a less hawkish policy outlook could ease some of that pressure.

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