The Canadian dollar weakened to a seven-month low against the greenback on Thursday, trading 0.3% lower at 1.3980 per U.S. dollar, or 71.53 U.S. cents. According to reports from Reuters, the loonie earlier touched its weakest level since November at 1.4023 before clawing back some of its decline. The currency's weakness reflects broader market dynamics affecting the Canadian economy, with recent developments including escalating Middle East tensions adding additional pressure.
Hopes for a peace deal to end hostilities in the Middle East took a big hit after the U.S. military launched "self-defense" strikes against Iran, following a promise by Trump that Washington would respond to the shooting down of an American helicopter that was patrolling over the Strait of Hormuz. Iran has not claimed responsibility for the downing of the helicopter. The president then on Thursday morning said Iran had taken too long to negotiate a peace deal and "will have to pay the price." He reiterated that "much of" Iran's military had been eradicated by a joint U.S.-Israeli campaign that is now in its fourth month, claiming that the "Bully of the Middle East is DEAD!!!"
The Canadian 2-year yield fell as much as 131 basis points below the equivalent U.S. rate, marking the largest gap since June 2025, before recovering to about 128 basis points. As reported by Reuters, Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets, attributed the weakness primarily to interest rate spreads. He noted that weak domestic data over the last several weeks and a more dovish Bank of Canada have contributed to wider spreads, with investors favoring the higher-yielding U.S. currency.
The Bank of Canada left its benchmark interest rate unchanged at 2.25% for a fifth straight time on Wednesday, according to Reuters reports. The central bank stated it was seeing limited evidence that higher energy prices were fueling broad-based inflation. This dovish stance has contributed to the widening yield spreads between Canadian and U.S. markets, creating additional pressure on the Canadian dollar amid current geopolitical uncertainties.
Canada's economy added 87,800 jobs and the unemployment rate fell to 6.6% in May, as reported by Reuters. This data helped wipe out much of the job declines since the start of the year. However, the price of oil, one of Canada's major exports, gave back earlier gains to trade 2% lower at $88.21 a barrel after U.S. President Donald Trump said he has canceled strikes against Iran that had been scheduled for later in the evening. The oil price decline added to pressure on the Canadian dollar amid the escalating Middle East tensions.
According to Reuters reports, Benjamin Reitzes noted that investors will need to see a run of solid data like better jobs numbers before things begin to look more positive for the Canadian dollar. Canadian bond yields moved lower across a flatter curve, tracking moves in U.S. Treasuries, with the 10-year yield down 7 basis points at 3.427%. The U.S. dollar edged lower against a basket of major currencies as Wall Street rallied, providing some relief for the Canadian dollar's recent weakness amid the current geopolitical uncertainties.
