USD/CAD Stuck at a Crossroads: Fading War Risk Meets a Hawkish Fed, While Oil Pulls in Two Directions

USD/CAD edged lower to around 1.4100 in Thursday's Asian session, snapping a five-day winning streak — but the modest pullback masks a more complicated tug-of-war beneath the surface that traders should understand before reading too much into the dip.

Why the Dollar Eased First

The immediate trigger was fading safe-haven demand for the Greenback. BBC reported late Wednesday that the White House confirmed President Trump and Iranian President Masoud Pezeshkian signed a preliminary memorandum of understanding aimed at ending the US-Israel war on Iran. This followed an earlier electronic signing of the initial framework by US Vice President JD Vance and Iranian Parliamentary Speaker Mohammad Bagher Ghalibaf earlier in the week — a two-stage signing process that has gradually built market confidence the de-escalation is real rather than rhetorical.

But the Fed Is Pulling the Dollar the Other Way

Here's where the picture gets more interesting: just as geopolitical risk fades, a separate and arguably more durable force is working to support the Dollar. The Federal Open Market Committee voted unanimously to hold its benchmark rate at 3.50%–3.75% in new Chair Kevin Warsh's first meeting at the helm, where he vowed to aggressively restore price stability. More importantly, the Fed's June Summary of Economic Projections showed half of FOMC members now expect at least one rate hike before year-end — a notable shift given that resilient labor market data and persistent underlying inflation are continuing to drive tightening pressure even as the Iran conflict has created economic disruption elsewhere.

This sets up a genuine push-pull dynamic for USD/CAD: a de-escalating Middle East reduces the Dollar's safe-haven premium, while a hawkish Fed independently supports it through the interest-rate channel. The net effect so far has been only a modest Dollar pullback rather than a sustained decline — consistent with these two forces partially offsetting each other rather than one clearly dominating.

Oil: The Wildcard That Cuts Both Ways for CAD

The Canadian Dollar's side of this trade adds a third layer of complexity. As a commodity-linked currency, CAD typically draws support from rising oil prices, and West Texas Intermediate is currently holding gains near $75.10 per barrel. On paper, that should help cushion CAD against any broader Dollar strength.

But the same forces working for and against the Dollar are also working against oil's upside. Easing Middle East tensions reduce the supply-disruption risk premium that had been propping up crude prices, while rising odds of Fed rate hikes by the end of 2026 typically weigh on commodity prices broadly, since tighter monetary policy tends to dampen demand expectations and strengthen the Dollar, making dollar-denominated oil more expensive for foreign buyers. In other words, the very de-escalation supporting CAD-positive oil prices today is also the same de-escalation that removes the geopolitical premium keeping those prices elevated — a tension that could resolve in either direction depending on how quickly Hormuz shipping normalizes and how the Fed's hawkish signals evolve.

What This Means for the Pair Going Forward

For USD/CAD specifically, the path forward likely hinges on which of these three forces — fading war risk, Fed hawkishness, or oil's own supply-demand rebalancing — proves most persistent. A continued de-escalation narrative without further hawkish Fed surprises would likely keep USD/CAD under modest pressure. Conversely, if incoming US inflation or labor data reinforces the FOMC's rate-hike lean, Dollar strength could resume regardless of how the Iran situation progresses, potentially outweighing any oil-driven support for CAD.

Why This Matters for Southeast Asian Traders

The same Fed dynamics pressuring or supporting USD/CAD are also relevant for ASEAN currency pairs, since a genuinely hawkish Fed tends to strengthen the Dollar broadly against regional currencies. Meanwhile, oil-importing Southeast Asian economies such as Thailand and the Philippines stand to benefit from any sustained reduction in crude prices tied to Middle East de-escalation — even as commodity exporters with currency dynamics similar to CAD, including parts of the regional energy sector, would see the opposite effect.

What to Watch

Further details on the formal Iran-US signing timeline, incoming US labor and inflation data that could validate the FOMC's hawkish lean, and oil price direction as markets weigh fading supply risk against tightening monetary conditions.

Sources: BBC, Federal Reserve, US Energy Information Administration.

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