Canadian Dollar Weakens Amid Tariff Threat

Photo Credit: morningstar.ca

The Canadian dollar’s equivalent US value has dropped from about 75 cents USD — its highest value in 2024 — to today’s value of about 70 cents USD, and experts warn it may continue to drop. Economists point to incoming American tariffs on Canadian goods, and Canada’s potential counter-tariffs, as the leading cause of the loonie’s depreciation. 

A possible tariff war would be detrimental to the Canadian economy, and therefore the value of the Canadian dollar because over 75 per cent of Canada’s exports go to US markets. 

In some cases, Canada exports natural resources — such as lumber, steel, and oil — that are refined and processed in the US, and then sold back to Canadians. Products that cross the border twice could effectively pay a 50 per cent tariff, as both US and Canadian tariffs would be applied to the same product.

For example, 80 per cent of raw oil exports in Canada are sent down to the US for refinement. However, a significant amount of product is then exported back to Canada, where 53 per cent of the supply of refined oil originates from the US, resulting in Canadians effectively paying a 50 per cent tariff. 

Such high tariffs are expected to take a toll on the economy — and therefore the value of the Canadian dollar — according to a Bank of Canada (BoC) analysis. An estimated 2.5 per cent contraction in GDP, and a 0.8 increase in inflation was projected to occur over the next year, according to BoC forecasts.

Another possible indication of an upcoming economic downturn is the central bank’s continued lowering of its policy interest rates from 3.25 per cent to 3 per cent. This results in Canadian banks charging interest rates that are based around this 3 percent rate, which makes it cheaper for Canadians to take out loans, typically leading to more economic growth. 

The National Bank’s website puts into words the benefits of low interest rates: “If you’ve got a project in mind, like renovating your kitchen or buying a car, a rate cut could be a good time to make your plans a reality!”  

CIBC Economist Katherine Judge told CTV News that she expects the Canadian dollar to hover around 0.70 cents US over the next few months, a prediction that’s held merit. At the time of writing, one Canadian dollar CAD is worth 0.70 cents USD.