Wed 02 Sep 2026 | 08:52 PM
A Canadian dollar coin, commonly known as the “Loonie”, is pictured in this illustration picture taken in Toronto, January 23, 2015. REUTERS/Mark Blinch/File Photo
The Canadian dollar recovered from a nearly three-week low against its U.S. counterpart on Wednesday as investors increased their bets on a potential Bank of Canada interest-rate hike later this year, after the central bank warned of rising inflation risks.
The loonie rose 0.2% to C$1.3870 per U.S. dollar, equivalent to 72.10 U.S. cents, after weakening earlier in the session to C$1.3939, its lowest level since August 13, according to Reuters.
The currency’s rebound came as investors shifted their focus toward inflation risks despite the Bank of Canada leaving its benchmark interest rate unchanged at 2.25%, in line with market expectations.
The Bank of Canada kept monetary policy on hold but warned that the ongoing conflict in the Middle East had increased the risk of inflation running above previous expectations.
At the same time, new U.S. tariffs have added to uncertainty surrounding Canada’s economic outlook, leaving policymakers facing a difficult balancing act between persistent inflation pressures and the prospect of weaker economic activity.
Avery Shenfeld, chief economist at CIBC Capital Markets, said markets appeared to be assigning greater weight to inflation concerns than to uncertainty surrounding economic growth, helping strengthen expectations for tighter monetary policy.
Market pricing now implies roughly a 75% probability of at least one Bank of Canada rate increase this year, up from 64% before the central bank’s latest announcement.
The shift marks a notable change in investor expectations over the future path of Canadian monetary policy.
Investors will turn to Canada’s trade and employment reports, due on Thursday and Friday respectively, for fresh signals on the strength of the domestic economy and its ability to withstand external pressures.
The labor-market data will be particularly closely watched as traders assess whether the Bank of Canada could raise rates without placing additional strain on economic activity.
Canada remains heavily exposed to developments in trade relations with the United States, its largest trading partner. Newly imposed U.S. tariffs have heightened uncertainty surrounding Canadian growth, investment and international trade.
The Canadian dollar also benefited from oil prices holding near their highest level in a month. Traders continued to assess the risk of supply disruptions following overnight strikes involving the United States and Iran.
U.S. crude futures rose 0.3% to $90.46 a barrel, providing additional support to the Canadian currency, which tends to benefit from stronger energy prices given Canada’s position as a major oil exporter.
In Canadian bond markets, government bond yields rose across maturities. The two-year yield climbed 3.9 basis points to 3.058%, approaching the upper end of its range since March.
Meanwhile, the yield gap between two-year Canadian and U.S. government bonds narrowed by 4.1 basis points to around 133 basis points in favor of U.S. Treasuries.
