Key Highlights
- The Canadian dollar rose 0.1% to 1.3982 per US dollar, reaching its strongest intraday level since September 16.
- The Bank of Canada’s 25-basis-point rate increase to 2.50% narrowed the two-year bond yield gap with the US to around 128 basis points.
- Elevated oil prices and a weaker US dollar provided additional support, while Ontario projected a wider budget deficit and a delayed return to balance.
The Canadian dollar strengthened to a six-week high against the U.S. dollar on Thursday after the Bank of Canada’s latest interest rate increase narrowed the gap between Canadian and U.S. bond yields. The central bank increased its benchmark interest rate by 25 basis points to 2.50% on Wednesday, signaling that further increase may be necessary to prevent higher energy costs from feeding into broader inflation. Meanwhile, the U.S. Federal Reserve kept its policy rate unchanged. The relative shift in yield spreads, combined with escalated oil prices and a weaker U.S. dollar, supported the loonie as investors evaluated the prospect for monetary policy and the Canadian economy.
Why Did the Canadian Dollar Strengthen Against the US Dollar?
The Canadian dollar, also known as the loonie, was trading 0.1% higher at 1.3982 per U.S. dollar, equivalent to 71.52 U.S. cents. Earlier in the session, it reached 1.3966, its strongest intraday level since September 16. The currency’s gains followed a narrowing in the difference between Canadian and U.S. two-year government bond yields. The gap declined by 4.7 basis points to approximately 128 basis points in the favor of U.S. Treasury notes. Earlier this month, the spread had widened to as much as 160 basis points, its largest level since February 2025.
The Bank of Canada’s decision to raise interest rates helped reduce the yield gap, while the Federal Reserve’s decision to hold rates steady added to the contrast between the two central banks’ policy directions. A narrower yield differential can make Canadian dollar assets relatively more appealing to investors, supporting demand for the currency. The latest movement in bond yields also strengthened traders’ confidence in the loonie’s potential to make further gains. The yield spread move was “giving traders conviction to chase further gains for the loonie”, said Amo Sahota, director at Klarity FX in San Francisco.
Oil prices provided another source of support. Crude oil is one of Canada’s major exports, meaning elevated prices can improve the country’s export revenues and support its currency. U.S. crude oil futures settled 0.8% lower on Thursday amid hopes for peace talks between the United States and Iran. However, prices remained elevated at around $102 a barrel, continuing to provide some support to the Canadian dollar. The U.S. dollar also weakened against a basket of major currencies as the U.S. Treasury yields eased following the release of inflation data that was largely in line with market expectations. The softer dollar helped Canadian currency extend its gains.
What Could Influence the Canadian Dollar’s Perspective?
The Bank of Canada’s latest rate decision remains a key factor for currency traders, particularly as policymakers consider the potential impact of higher energy costs on inflation. The central bank raised its benchmark interest rate by 25 basis points to 2.50% and signalled that extra increases might be required if energy-related price pressures begin spreading across the wider economy. By contrast, the Federal Reserve left its policy rate unchanged.
This difference in monetary policy decisions has contributed to the narrowing of the yield gap between the two countries, which could remain a crucial driver of the Canadian dollar in the coming sessions. However, the currency’s direction will also depend on movements in oil prices, US bond yields and broader economic growth. Any sustained decline in crude prices could decrease one source of support for the loonie, while changes in expectations for US interest rates could influence the relative appeal of Canadian-dollar assets.
Developments in Canada’s fiscal outlook are also garnering attention. Ontario, one of the world’s largest sub-sovereign borrowers, projected a wider budget deficit than previously expected in its latest fiscal update. The province also indicated that its return to a balanced budget would be delayed. The updated outlook reflects planned tax relief for businesses and support for industries affected by US tariffs.
These measures are intended to assist sectors facing trade-related pressures, although the larger projected deficit highlights the fiscal challenges facing the province. The Canadian 10-year government bond yield was down half a basis point at 3.853% on Thursday.
For currency markets, the immediate focus remains on whether the narrowing yield differential and elevated oil prices can continue supporting the Canadian dollar. Investors will also be watching inflation developments and signals from both central banks about the next stage of monetary policy.
