Weakening Loonie Reflects U.S. Economic Strength and Domestic Challenges
The Canadian dollar is expected to continue its downward trajectory in the coming months, as a mix of domestic and international factors weighs heavily on the loonie, according to economists.
Currently trading below 70 cents USD, the loonie has declined nearly 4% since September. Analysts predict a turbulent period ahead, exacerbated by uncertainty over policy shifts from incoming U.S. President Donald Trump.
U.S. Policies and Economic Strength
Karl Schamotta, chief market strategist at Corpay, points to the strength of the U.S. economy and rising yields, which have outperformed Canada’s, attracting global investments south of the border. Additionally, diverging monetary policies between the Bank of Canada and the U.S. Federal Reserve are making the Canadian dollar less appealing.
“The Canadian dollar is much less attractive to global investors,” Schamotta said.
The U.S. Federal Reserve recently implemented a quarter-percentage-point interest rate cut and signaled a slower pace of cuts for 2025. In contrast, the Bank of Canada has enacted two significant rate cuts this month, bringing its key rate down to 3.25%.
Domestic Challenges
Adam Button, chief currency analyst at Forexlive, highlights Canada’s shrinking economy and forecasts of negative population growth for 2025 as critical factors. Population growth has been a primary driver of Canadian economic expansion over the past two years, and its reversal poses challenges.
Button also notes that a weakening Canadian dollar is no longer the economic boon it once was. The historic link between the loonie and oil prices has diminished, with interest rate changes now playing a more significant role in shaping Canada’s economic outlook.
“The investment cycle in the oil and gas sector has ended and doesn’t look like it’s coming back any time soon,” Button said.
Short-Term Pain, Long-Term Prospects
Schamotta anticipates further declines in the Canadian dollar during the early months of 2025, with gradual improvement later in the year as the Bank of Canada’s rate cuts begin to stimulate the housing market and consumer spending.
However, ongoing tariff threats from the U.S. are fueling market volatility. “Traders are in a ‘sell-first-and-ask-questions-later mode,’” Schamotta explained, adding that much depends on Trump’s policy actions in the coming months.
Button emphasized that the Canadian dollar’s fortunes are tightly tied to U.S. dollar strength. “Until the U.S. economy stumbles, I don’t see a real opportunity for the Canadian dollar to right itself,” he said.
Implications for Canada
A weaker loonie could increase the cost of imports, impacting Canadian consumers and businesses. Unlike in the past, the Canadian dollar’s depreciation is less likely to spur a resurgence in manufacturing and exports, reflecting structural changes in the economy.
As economists monitor developments both domestically and in the U.S., the Canadian dollar faces a challenging road ahead, shaped by global investor sentiment, trade policies, and domestic fiscal conditions.