The loonie has hovered just above 70 US cents this week, down from a high above 74 US cents in late January.Mark Blinch/Reuters
The Canadian dollar has tumbled to its lowest mark since the early weeks of U.S. President Donald Trump’s trade war in 2025, a slide that is being driven by strong demand for U.S. dollars and a hawkish turn at the Federal Reserve.
The loonie has hovered just above 70 US cents this week, down from a high above 74 US cents in late January. It had dropped below 69 US cents last year as the second Trump administration embraced protectionist trade policies that posed threats to the Canadian economy.
Of late, however, the currency’s weakness is largely a story of U.S. dollar strength. A resilient U.S. economy, booming American equity markets and the potential need for higher U.S. interest rates to quell inflation are pushing up the greenback.
“The Canadian dollar has been sort of caught up in that move, but it has been a broader move against most of the major global currencies,” George Davis, chief technical strategist at RBC Capital Markets, said in an interview.
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As the loonie continues to weaken, so will Canadian purchasing power as imported goods and services from the U.S. become more expensive. Canadian businesses that source inputs from south of the border will also face higher costs that could hamper production and employment opportunities in this country.
On the other hand, a weak Canadian dollar can benefit international tourism and investment here, as well as exporting sectors, offering some relief for industries hit by tariffs and trade uncertainty.
“There’s a lot of things going for the U.S. dollar at the moment,” said Sarah Ying, head of FX strategy at CIBC Capital Markets. “The dollar is going to be hot unless something breaks.”
Ms. Ying said the greenback’s rally over the past few months is being driven by massive capital investments in artificial intelligence and demand for U.S. technology stocks, along with underlying economic strength.
More recently, the Federal Reserve has signalled that higher interest rates may be needed to bring inflation to heel. At its June meeting, the Fed dropped language around potential rate cuts from its statement.
“It’s very hard to see how the Fed would cut rates in this environment as the U.S. economy remains quite resilient,” said Jennifer Lee, senior economist and managing director at Bank of Montreal.
The 1.25-to-1.50-percentage-point gap between Canadian and U.S. policy rates – also known as the interest-rate differential – is widely expected to continue weighing on the loonie. Because U.S. interest rates are higher, American bonds are more attractive for investors seeking risk-free returns, thus creating demand for U.S. dollars. During this easing cycle, the Bank of Canada has cut far sooner – and to a greater degree – than the Fed.
Swaps markets see a 50/50 chance of the BoC raising rates by a quarter percentage point by the end of the year, according to Bloomberg data. Meantime, investors are expecting one or two rate hikes from the Fed by the end of 2026.
Contrary to what markets are pricing in, Shaun Osborne, chief currency strategist at Scotiabank Global Banking and Markets, expects the Fed to eventually move in the opposite direction. His bank anticipates the U.S. economy to slow and inflationary pressures to retreat as conflict between the U.S. and Iran quiets down.
“Those things combined suggest to us that rate cuts are more likely than rate increases in the U.S.,” he said in an interview.
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Mr. Osborne said a combination of higher interest rates in Canada – something his bank also forecasts – and lower interest rates in the U.S. would allow the Canadian dollar to pick up some ground as the rate spread compresses, although the timing is uncertain.
Canada’s economy, meanwhile, has largely stagnated over the past year and faces considerable uncertainty over the trade outlook. The United States-Mexico-Canada Agreement is unlikely to be extended by the July 1 deadline, though it will remain in place as the three countries negotiate the terms of a deal.
The Canadian dollar has declined in recent months despite the run-up in oil prices during the Middle East war. The relationship between the loonie – which is no longer widely considered a petro-currency – and oil prices has unravelled over the past decade as investment in the domestic energy sector has fallen sharply.
The uncertainty for Canada’s economy points to the Bank of Canada extending its hold position for the balance of this year.
“I think there would be a lot of question marks if [the Bank of Canada] actually started talking about tightening at this point,” Ms. Lee of BMO said.