The US Dollar (USD) has maintained its strength against both the Canadian Dollar (CAD) and the Indian Rupee (INR), driven by a hawkish Federal Reserve stance and rising US Treasury yields. The USD/CAD pair traded around 1.4270 during Asian hours on Thursday, marking its second consecutive day of gains, despite higher crude oil prices that typically support the commodity-linked Canadian Dollar. Oil prices surged following reports that the Trump administration directed the Pentagon to draft strike options against Iran ahead of the US midterm elections, and disruptions in the Gulf of Mexico due to Tropical Storm Isaias, which led to the shutdown of over 510,000 barrels per day of crude output—about a quarter of the region's total production [1].
Political uncertainty in Canada is also weighing on the CAD. Rabobank analysts highlighted increased political fragmentation, citing the Quebec provincial election where the separatist Parti Québécois won around 30 percent of the vote and secured 59 of 127 seats, forming a minority government. Additionally, Alberta is set to vote on whether to consider independence from Canada on October 19, further increasing political risk for Canadian assets [1].
The US Dollar's strength is underpinned by the Federal Reserve's hawkish tone. Minutes from the Fed's September meeting showed unanimous support among all 19 policymakers for the recent rate hike, with most agreeing that another increase could be necessary before year-end. The CME's FedWatch tool indicates a 78.3% probability of a December rate hike, while US Treasury yields have rebounded to levels not seen since 2002, with the 10-year and 30-year notes trading around 5.32% and 5.70%, respectively. Market participants are closely watching upcoming speeches from Fed officials for further guidance [1].
In India, the Rupee opened mildly higher against the US Dollar on Thursday, reportedly due to likely intervention by the Reserve Bank of India (RBI), which sold US dollars near the market open to support the currency, according to four traders cited by Reuters. The USD/INR pair was trading at around 96.72, close to its all-time high of 97.00. The RBI's Monetary Policy Committee unanimously raised the policy repo rate by 25 basis points to 5.50%, its first hike in four years, and shifted its stance to 'calibrated tightening,' signaling that rate cuts are off the table in the near term. ING economists noted that further tightening will depend on growth and inflation dynamics, with external risks such as international oil prices and global monetary conditions playing a key role [2].
Oil prices, which had been under pressure in recent weeks, rebounded after a tanker north of Qatar was struck by multiple projectiles, causing casualties, according to the United Kingdom Maritime Trade Operations agency. Higher oil prices are negative for oil-importing countries like India, increasing the risk of imported inflation and complicating the RBI's policy path. ING analysts warned that further Fed tightening is likely to keep the US Dollar stronger for longer, maintaining depreciation pressure on the INR [2].
CONCLUSION
The US Dollar's broad-based strength, fueled by a hawkish Federal Reserve and surging Treasury yields, is putting pressure on both the Canadian Dollar and Indian Rupee. Rising oil prices add further challenges, particularly for oil-importing economies like India. Political uncertainty in Canada and the risk of imported inflation in India suggest continued volatility for both currencies in the near term.