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USD/CAD: Loonie Gains as U.S. Dollar Retreats, Likely to Remain Volatile Ahead of Fed Meeting

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The Canadian dollar strengthened against the U.S. dollar in early trade Monday as weaker greenback supported the commodity currency; however, it will likely remain volatile ahead of the Fed monetary policy decision this week.

The dollar to loonie conversion today fell to 1.2523 against the U.S. currency, down from Friday’s close of 1.2561. The Canadian dollar had lost about 3% in June – posting the biggest monthly drop since March 2020, the early days of the pandemic, and weakened over 1.4% so far this month.

“With respect to the Canadian dollar, recent price action has reflected risk-off sentiment and investors flocking into USD assets. Additionally, global growth fears are putting pressure on commodity prices, that have eased back from recent peaks despite remaining at fairly elevated levels. This leaves CAD trading close to our 80 U.S. cent estimate of fair value,” noted Beata Caranci, SVP & Chief Economist at TD Economics.

“In the near term, movements in the Canadian dollar will likely be tied to movements in risk-sentiment. If financial markets gain comfort that the Delta variant won’t upend the global economy, a rise in risk sentiment would maintain a floor under CAD and offer some modest upside.”

Canada is the world’s fourth-largest exporter of oil, edged lower on surging COVID-19 cases cast a shadow on global demand. U.S. West Texas Intermediate (WTI) crude futures traded lower by 0.33 cents, or 0.43%, to $71.75 a barrel.

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.38% lower at 92.561 – not far from this year’s high of 93.437.

The U.S. Federal Reserve is due to make an interest rate decision on Wednesday. Traders remain cautious ahead of the policy decision as any unexpected hawkish surprise would lift the greenback.

The world’s dominant reserve currency, the USD, is expected to rise further over the coming year, largely driven by the Fed’s expectation of two rate hikes in 2023. A strengthening dollar and growing risk that the Federal Reserve would tighten its monetary policy earlier than expected would push the USD to CAD pair higher.

This article was originally posted on FX Empire

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