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.

Dull outlook for commodity prices

Another known driver of the Canadian dollar, commodity prices, have risen quite a bit over the past year. The Bank of Canada’s commodity price index at the end of January was up about 6% year-over-year. Clearly, the positive effect of commodities on the currency is being dwarfed by the above-mentioned yield disadvantage and USD strength. Going forward, one can expect the U.S. tariffs and likely retaliatory actions by America’s trade partners to further curtail world trade and limit global GDP growth. If history is any guide, a slowdown of global growth should weigh on commodity prices, and therefore on the Canadian dollar.

Soft Canadian economy

Part of the loonie’s woes is due to low confidence about Canada’s economy among foreign investors. The 2025 forecast for real GDP growth, which many analysts, including us, had pegged at a meagre 1.5% or so (i.e., the average of the last couple of years), may now be revised even lower in light of U.S. tariffs. The longer the trade war lasts, the worse will be the GDP hit, increasing the likelihood of a recession, and therefore more aggressive interest rate cuts by the Bank of Canada. Retaliatory tariffs by Canada on the U.S. will make American goods more expensive and, accordingly, reduce Canadian demand for them. As such, our importers are expected to lower their demand for U.S. dollars, which will provide some support to the loonie. But overall, the impacts of tariffs are unambiguously negative for the Canadian currency.

So, there is downside potential for the loonie, at least over the near term. Exporters may see the silver lining of an even weaker currency, as long as they have market access. But if you’re an importer or a business trying to boost productivity using imported machinery and equipment, then further currency weakness won’t help.

When will the tariff drama end?

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