What do tariffs mean for the Canadian dollar?

Only the brave would be optimistic about the Canadian dollar these days. The currency’s depreciation over the past year has been spectacular, from around 75 U.S. cents just twelve months ago to less than 70 cents this week. So, what happened to the loonie, and how will it fare amid tariff-related uncertainties?

U.S. dollar strength

To be fair, the Canadian dollar isn’t the only major currency struggling to get a grip amid U.S. dollar strength. The trade-weighted U.S. dollar index, which is calculated by the Federal Reserve (Fed), and measures the value of the USD relative to other world currencies, is currently at its highest level in over 20 years. The U.S. economy outperformed several of its peers last year, meaning that inflation and therefore the Fed’s interest rates have generally been higher than in other developed economies. This yield advantage attracts foreign capital to America and accordingly boosts the U.S. dollar relative to other major currencies. At the end of January, for example, the policy interest rate was 4.50% in the U.S. and just 3.00% in Canada. The last time Canada’s yield disadvantage was that large was back in December 1997, when the loonie was trading near 70 cents.

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