The USD/CAD currency pair drifted lower on Wednesday, trading around 1.3891 after reaching its highest level since December 2025 earlier in the week, as the US Dollar (USD) weakened amid improving global risk sentiment and dovish signals from the Federal Reserve (Fed) [1][4]. The pullback in the USD was attributed to comments from US President Donald Trump suggesting the US-Iran war could end within 'two or three weeks,' which boosted risk appetite and reduced demand for the Greenback as a safe-haven asset. However, tensions remain unresolved, particularly regarding the reopening of the Strait of Hormuz, with conflicting statements from US and Iranian officials about ceasefire requests [1].
Despite stronger-than-expected US economic data—including an ISM Manufacturing PMI of 52.7 in March (vs. 52.5 expected), ADP Employment Change rising by 62K (vs. 40K expected), and Retail Sales up 0.6% in February (vs. 0.5% forecast)—the USD Index (DXY) hovered near a one-week low at 99.40, down 0.38% on the day, after peaking at 100.64 earlier in the week [1][4]. In contrast, the Canadian S&P Global Manufacturing PMI fell to 50 in March from 51 in February, indicating stagnation in the sector [1].
Scotiabank strategists noted that the Canadian Dollar (CAD) remains only slightly firmer versus the USD, lagging other G10 currencies despite broad USD weakness. They highlighted the CAD's undervaluation relative to their fair value estimate of 1.3495 for USD/CAD and observed that the recent rally showed exhaustion near 1.39, with technical indicators signaling a potential reversal and a near-term range of 1.3850–1.3950 [3].
On the monetary policy front, St. Louis Fed President Alberto Musalem stated that US monetary policy is 'well positioned' and should remain on hold for some time, citing increased risks from war shocks, supply disruptions, and tariffs, but also noting that the baseline outlook is for good growth, moderating inflation, and stable unemployment [1][4]. TD Securities analysts expect the upcoming March US labor report to show a normalization in Nonfarm Payrolls (NFP) with headline gains of 30k and an unemployment rate of 4.4%. They see risks skewed dovish, reinforcing expectations that the Fed will maintain its current policy stance. They also suggest that weak employment data could trigger further USD weakness, though overall FX positioning remains net long USD due to ongoing Middle East uncertainties [2].
Market reaction to these developments has been a softer USD, with the USD Index down and USD/CAD drifting lower. Analysts see scope for a meaningful CAD recovery if risk sentiment continues to improve and the USD remains under pressure [1][3][4].
CONCLUSION
The USD/CAD pair has retreated from recent highs as improving risk sentiment, dovish Fed signals, and geopolitical developments weigh on the US Dollar. Despite strong US data, the market focus remains on Fed policy and Middle East risks, with analysts expecting continued USD softness and potential for a CAD rebound if current trends persist.