Loonie Slips as Fed Rate Bets Rise, Bond Yields Climb Ahead of BoC Decision

The Canadian dollar weakened against its US counterpart on Tuesday, sliding 0.4% to 1.3905 per US dollar, or 71.92 US cents. The move made the loonie one of the worst performers among Group of Ten currencies as traders increased their bets that the Federal Reserve will raise interest rates next month to bring inflation back to its 2% target.

A currency strategist noted that the loonie was a clear laggard in G10 FX trading, with market participants expecting the Fed to act in September. At the same time, the Bank of Canada is widely expected to hold its benchmark rate at 2.25% on Wednesday, though some analysts suggest the central bank may adopt a slightly more dovish tone given the escalating trade dispute with the United States.

Prime Minister Mark Carney told reporters that the US needs to take negotiations seriously and drop its tough stance before talks on a possible trade deal with Canada can resume. The comments come as Canada's manufacturing sector expanded for a fifth consecutive month in August, with output and employment rising, though increased trade tensions have cast doubt on whether that pace of growth can be sustained.

In commodities, oil prices rose to a near six-week high, with US crude futures trading 4.4% higher at $89.53 a barrel, as renewed fighting between the United States and Iran in the Middle East stoked fears of supply disruptions from the oil-producing region.

Meanwhile, the Canadian 10-year yield rose 1.5 basis points to 3.754%, after earlier touching its highest level since May 2024 at 3.790%, reflecting a broader sell-off in global bond markets.