The Canadian dollar depreciated against the U.S. dollar on Thursday, weighed down by growing concerns regarding the divergence in monetary policy between the two countries. The loonie fell to its lowest level in recent weeks as markets anticipate a more hawkish stance from the U.S. Federal Reserve compared to the Bank of Canada.
Analysts attribute the Canadian dollar’s weakness to the expectation that the U.S. Federal Reserve will begin raising interest rates sooner than the Bank of Canada. This anticipated divergence in interest rate policies has led to a widening interest rate differential, making the U.S. dollar more attractive to investors.
Several factors are contributing to the Bank of Canada’s cautious approach, including:
- Concerns about the strength of the Canadian economy
- Low inflation
- High levels of household debt
The combination of these factors suggests that the Bank of Canada is unlikely to raise interest rates in the near future, further exacerbating the interest rate differential and putting downward pressure on the Canadian dollar.
Currency strategists predict that the Canadian dollar will remain vulnerable as long as the expectation of diverging monetary policies persists. The focus will remain on upcoming economic data releases and central bank communications for further clues about the future direction of interest rates in both countries.
