USD/CAD rose on Monday as tension in the Strait of Hormuz supported the US Dollar. The pair traded near 1.3617, up about 0.22% on the day.
Iran’s Fars news agency said two missiles hit a US naval vessel near Jask after it ignored IRGC warnings to stop. A US official denied any American vessel was struck, Axios reported.
Strait Of Hormuz Tensions Lift Dollar
The reports followed US President Donald Trump’s announcement of “Project Freedom” to escort commercial ships through the Strait of Hormuz. Tehran warned it would attack US forces if they tried to approach or enter the waterway.
Over the weekend, Washington rejected Iran’s revised 14-point proposal and sent a counteroffer now being reviewed in Tehran, with nuclear talks still unresolved. Trump told Israel’s Kan News, “It’s not acceptable to me. I’ve studied it, I’ve studied everything — it’s not acceptable.”
The US Dollar held firmer after earlier weakness, with the US Dollar Index near 98.28, extending Friday’s rebound from around two-week lows. Oil supply risks lifted crude prices, which supported the Canadian Dollar, though it still trailed the US Dollar.
Higher oil prices also raised inflation concerns and added to tighter-policy expectations for both the Fed and the BoC. Markets next focus on US and Canadian jobs reports due on Friday.
Oil Markets And Inflation Expectations
We are seeing a familiar pattern of geopolitical tensions supporting the US dollar, reminiscent of the US-Iran standoff we analyzed from the perspective of 2025. Today, renewed friction in the Red Sea shipping lanes is creating a similar safe-haven demand for the greenback. The US Dollar Index (DXY) reflects this sentiment, holding steady above the 105 mark.
This uncertainty in key shipping channels is directly impacting oil markets, providing a strong floor for crude prices. West Texas Intermediate (WTI) is currently trading above $85 a barrel, supported by recent data showing a larger-than-expected drawdown in US inventories. This situation mirrors the supply disruption fears we saw previously in the Strait of Hormuz.
For the Canadian dollar, high oil prices are supportive, yet the loonie is struggling against the overwhelming strength of the US dollar. We see the USD/CAD pair trading firmly around 1.3720, demonstrating that during heightened global risk, the USD’s status as the world’s reserve currency often dominates the CAD’s commodity correlation. This is a dynamic we have observed repeatedly in past crises.
Higher energy costs are now feeding into inflation concerns for both the Federal Reserve and the Bank of Canada. With the latest US Consumer Price Index (CPI) report showing core inflation persisting at 3.6%, traders should anticipate that the Fed will remain cautious about cutting rates. This environment suggests that buying volatility through options on USD/CAD could be a prudent strategy ahead of key data releases.
All eyes will now be on the upcoming employment reports from both nations this Friday. A strong US jobs number could cement expectations for a hawkish Fed, potentially pushing USD/CAD to test its year-to-date highs. Derivative traders should be positioned for increased price swings following the release.
