The Canadian dollar weakened to 1.37 per US dollar, testing one-month lows as escalating geopolitical risks and a slowing domestic economy drove investors back into the safety of the greenback. This retreat occurred despite an 8% surge in oil prices following the closure of the Strait of Hormuz, a move that would typically support the oil-linked Loonie. Instead, the US dollar’s safe-haven appeal dominated global currency markets.
Domestic headwinds intensified after fourth-quarter data confirmed a 0.6% contraction in Canada’s GDP, marking the slowest growth phase since 2020. Although the February manufacturing PMI rose to a 13-month high of 51, signaling a return to expansion, the uptick was overshadowed by mounting concerns that a protracted conflict in the Middle East could disrupt roughly 20% of global oil shipments and rekindle inflationary pressures.
Even with Canada benefiting from favorable trade exemptions under the latest US tariff measures, the Loonie remains pinned near its recent lows. The Bank of Canada now faces a difficult policy dilemma: managing the inflationary impact of higher energy prices while supporting an increasingly fragile domestic economy.
