Canadian Dollar Slips to New Two-Month Low as US Yields Rise, Fed Hike Bets Intensify

The Canadian dollar extended its decline against the US dollar on Thursday, falling for a fourth consecutive session, as the greenback broadly strengthened on surging US Treasury yields and rising market bets on Federal Reserve rate hikes. The USD/CAD exchange rate broke above the 1.4100 threshold for the first time in two months, touching the 1.4130 area during writing and currently trading around 1.41181, approaching the late-July high.

**US Bond Yields and Rate Hike Expectations as Core Drivers**

Recent gains in US Treasury yields, particularly at the policy-sensitive short end of the curve, have been a key factor underpinning the dollar. Market data show the two-year Treasury yield has risen to approximately 4.75%, a multi-year high, with futures markets pricing in about 80 basis points of further tightening over the next year. This reflects market conviction that the Fed is committed to fighting inflation and maintaining high rates. Although some investors are beginning to bet that the magnitude of hikes may fall short of expectations, higher yields are still providing strong upward momentum for the dollar in the near term.

**Loonie Under Pressure, External Factors Dominate Moves**

This round of decline in the Canadian dollar is primarily driven by external factors. The overall strength of the US dollar, combined with risk appetite suppressed by the high-rate environment, has clearly weakened commodity currencies like the loonie. After USD/CAD broke through the psychological 1.4100 level, technical buying further pushed the pair toward the late-July high of 1.4130. If upcoming US inflation or employment data continues to support the Fed's hawkish stance, the Canadian dollar could face additional downside pressure.

**Outlook: Policy Path and Economic Data in Focus**

Looking ahead, the loonie's trajectory will remain closely tied to expectations for the US-Canada rate differential and commodity market sentiment. Markets are closely watching upcoming US economic data and Fed officials' remarks to gauge the future path of rate hikes. Any signals of US economic resilience or persistent inflation could continue to lift US Treasury yields and the dollar, thereby sustaining pressure on the Canadian dollar.