Canadian Dollar Tumbles Amid Diverging Policies of Bank of Canada and Federal Reserve
The Loonie’s Slide Highlights Diverging Economic Paths for Canada and the U.S.
The Canadian and U.S. economies often move in tandem, but the sharp decline of the Canadian dollar—the loonie—against the U.S. dollar signals this time might be different. The loonie has been steadily losing ground to the greenback, a trend that intensified this month as the Bank of Canada and the Federal Reserve diverged in their economic outlooks. While the U.S. economy appears poised for robust growth, Canada’s economy is facing significant challenges. This kind of weakness in the loonie is typically associated with deep global recessions, and with Canada focusing on non-productive investments, relief may not come soon.
A Weak Loonie Offers Little Boost to Canada
A declining currency can have mixed effects on an economy. A weaker loonie can make Canadian assets more attractive to foreign investors, offering discounts on land, labor, and other costs. Historically, this has driven investments from U.S. tech firms, the film industry, and other sectors, spurring job creation. However, this time could be different.
The U.S. is actively reshoring industries after decades of offshoring—a bipartisan effort championed by past and current administrations. This strategy directly counters the potential benefits of a weak loonie, as American companies prioritize domestic production over cross-border investments.
The global role of the U.S. dollar as the reserve currency adds further complications. Commodities like oil, lumber, and wheat are priced in U.S. dollars, meaning a weaker loonie drives up costs for Canadian consumers and businesses alike. Even if commodity prices remain steady, a weaker currency inflates the cost of living, potentially straining households and businesses.
Canada’s reliance on imports for machinery and equipment exacerbates the issue. With these items priced in U.S. dollars, Canadian firms face higher costs for essential investments in productivity—an area where Canada already lags significantly, according to the Bank of Canada.
Historic Decline in the Loonie
The loonie has fallen to historic lows, opening today at US$1.444 (C$1 = US$0.69), a level not seen since 2003. In the past 40 years, the loonie has only experienced similar weakness for about four years total.
Several factors are driving this decline, with recent moves by the U.S. Federal Reserve playing a key role. The Fed’s decision to pause interest rate cuts, signaling confidence in the U.S. economy, contrasts sharply with the Bank of Canada’s “supersized” rate cut—a measure typically reserved for severe economic crises. The resulting divergence in rate spreads and inflation expectations has weighed heavily on the loonie.
Canada’s Economic and Political Challenges
Canada’s economic struggles are compounded by political uncertainty. The recent resignation of the Finance Minister and the release of a poorly received Fall Economic Statement have further eroded market confidence. Political instability and unclear economic direction leave investors wary.
Energy exports, once a pillar of Canada’s economic strength, have also played a reduced role in bolstering the loonie. While oil prices have remained neutral, they no longer provide the support they once did to the currency.
Different Paths, Different Outcomes
The U.S. economy’s focus on productive investments is yielding tangible results, with low unemployment and reaccelerating inflation indicating strong growth. In contrast, Canada has leaned heavily on non-productive investments and household credit expansion—short-term strategies that have led to higher unemployment and rising living costs.
The loonie’s plunge underscores the growing disparity between the two economies. Without a shift toward productive investment and clear economic leadership, Canada risks falling further behind its southern neighbor.
