The US dollar jumped broadly (0.5% against CAD) after a hotter-than-expected inflation report revived fears that the Federal Reserve would be forced to move more quickly than currently expected to rein in monetary stimulus. US core inflation in June came in at 4.5%, well above the 4% forecast, and the highest level for the figure since 1991. While the Fed has become more cautious about the risk of inflation recently, it has generally held to the view that the recent bout of inflation is transitory and therefore unproblematic. The higher and longer that these inflation figures hold, the more it will become likely that the Fed will have to amend its view and move quickly to taper asset purchases. That situation would push the US dollar up and the prospect of that move coming sooner-than-expected is why the US dollar jumped up this morning. For its part the Bank of Canada will have a chance to show its hand in tomorrow’s monthly interest rate decision. The Bank is not expected to change its current posture but if it does the exchange rate is in for a volatile couple of days. This morning, the USD to CAD is at 1.252 (CAD to USD at 0.799).
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