The Canadian dollar broke above 81 cents U.S. Wednesday, hitting the highest level since February 2018 amid a broad-based rally in commodity prices and a divergence in expectations for interest rate increases in Canada and the United States.

“This freight train has been rolling for a year now, but has really gathered momentum on the building strength in a broad range of commodities. The overtly hawkish Bank of Canada tone – versus a relentlessly dovish Fed – just pushed hard on an open door,” said BMO Financial Group Chief Economist Doug Porter in a report to clients Wednesday.  

The loonie has been steadily strengthening against the U.S. dollar in the wake of the Bank of Canada’s revised timeline for a potential interest rate increase. The central bank now sees a return to a normalized inflation environment in late 2022, putting a potential hike on the table around that time.

Bank of Canada Governor Tiff Macklem had earlier signaled the central bank would keep rates at their effective lower-bound until at least 2023. The U.S. Federal Reserve, by contrast, has indicated an interest rate increase may not be in the cards until 2024.

That divergent path created an environment for further strength in the Canadian dollar, according to Scotiabank Chief Foreign Exchange Strategist Shaun Osborne. In a note to clients, Osborne said that while rate hikes aren’t happening any time soon, the Bank of Canada’s more aggressive path should support the loonie against its U.S. counterpart.

“Rate hikes remain a long way off but markets are clearly factoring in the growing risk of a tightening after the middle of next year here. Expectations remain well short of that for the Fed.”

The Fed delivered a decidedly dovish tone on Wednesday by keeping rates on hold, and maintaining its view that “substantial further progress” is necessary before asset purchases can be scaled back. Chair Jerome Powell later underscored that the central bank is in no rush to adjust policy.

“We’ve had one great jobs report. It’s not enough. We’re going to act on actual data, not on a forecast, and we’re just going to need to see more data. It’s no more complicated than that,” he told reporters.

The loonie has rallied 3.1 per cent against the U.S. dollar this year, ranking it as the second-best performing G10 currency behind only the Norwegian Krone.