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The Canadian dollar weakened on Friday, heading for its sharpest weekly loss in more than two months.
As the currency's strength following comments from Federal Reserve Chairman Kevin Warsh outweighed a significant acceleration in Canadian economic growth.
The loonie traded near C$1.3900 per U.S. dollar, down about 0.3%, or about 71.94 U.S. cents. It had previously fallen to C$1.3908, a nine-day low, as investors increased bets on a possible Fed rate hike in September.
The currency's decline came despite data showing Canada's economy grew 3.3% year-over-year in the second quarter, rebounding sharply from the first quarter and posting its strongest quarterly expansion since 2023. The result also exceeded the Bank of Canada's previous forecast of 2.5%. Positive economic data provided little support for the loonie, as the second-quarter figures largely covered the period before the latest escalation of trade tensions between Canada and the United States. Markets are increasingly focused on how new US tariffs and Canadian retaliatory measures might impact growth in the second half of the year.
The main source of pressure was the US dollar. Warsh stated that the Fed faces additional work if inflation fails to make convincing progress toward its 2% target, prompting markets to raise the likelihood of a 25 basis point rate hike in September to about 57.5% from the previous 35%. The dollar index rose about 0.6% to 99.69, reaching its highest since August 17.
The currency remains vulnerable after talks between Canada and the US stalled last week, reviving concerns about the outlook for Canadian exports and economic growth. However, the loonie has held relatively steady against the US dollar compared to its position against the Australian dollar, with the aussie recently rising to a more than five-year high of C$0.9979.
Investors also watched Warsh's speech at the Jackson Hole Economic Symposium for guidance on the future course of Fed interest rates. On Friday, the dollar held near a one-week high as persistent inflation kept the prospect of a US rate hike open.
As for Canada, the Bank of Canada is forecast to keep its overnight interest rate at 2.25% at its September 2 meeting and keep it there until at least the third quarter of 2027, according to a Reuters poll of 35 economists. The forecast reflects uncertainty caused by the stalled trade talks with the US and concerns about the impact of weaker trade on economic growth.
The shift in US rate expectations has widened the divergence in the monetary policy stances of the two economies. The Bank of Canada is expected to keep rates on hold at 2.25%, limiting the potential for Canadian yields to follow US rates and making the loonie more vulnerable to a stronger dollar.