What has happened to our dollar since Monday? Why this weakness of the Canadian dollar for several weeks? A weakened dollar, who is it harmful for? Who is it beneficial for? What prospects for the loonie? Here’s what you need to know.
Published at 6:00 a.m.
What has happened with the Canadian dollar since Monday?
The Canadian dollar fell early Tuesday morning to its lowest level in four years, around 70.5 US cents. This relapse occurred on the currency market after the president-elect of the United States, Donald Trump, threatened to impose tariffs of 25% on Canadian exports upon his return to the White House next January .
The Canadian dollar strengthened a little during the day on Tuesday, but just above the threshold of 71 US cents. And still at its lowest value since spring 2020, when the pandemic economic recession began.
Why this weakness in the Canadian dollar?
In fact, the threat of tariffs has added to the downward pressures weighing on the value of the Canadian dollar since September.
“This is another fairly strong headwind against the dollar which was already under unfavorable pressure from the weakening of several indicators of the Canadian economy,” summarizes Robert Kavcic, senior economist at BMO Capital Markets, a subsidiary of the Bank. from Montreal.
Also, interest rate cuts by the Bank of Canada have reduced the appeal of the Canadian dollar among investors and traders in the international currency market.
The central bank has cut its benchmark rate four times this year, including a half-percentage-point cut in October to 3.75%.
It justified this easing of its monetary policy by the need to promote economic growth now that the inflation rate has fallen back to the target level of 2%.
A weakened dollar, who is it harmful for?
For citizens and businesses in Canada, a drop in the value of the Canadian dollar compared to its American neighbor increases the cost of their expenses and purchases of goods and services that must be paid for in American dollars.
This additional exchange rate cost mainly affects imports of goods and services payable in American dollars, hence the risk of “importing inflation” into the Canadian economy.
At the same time, the additional exchange rate cost also affects the spending of Canadians during trips and extended stays in the United States or elsewhere in the world, during which expenses are paid in American dollars.
A numerical example
At the start of 2024, when the Canadian dollar was trading at 75.5 US cents, an outlay of US$100 came to around $133 in Canadian dollars. Eleven months later, with the Canadian dollar weakened to 71 US cents, a similar outlay of US$100 comes to around $141 in Canadian dollars.
For the “ snowbirds » Canadians on a winter stay in the southern United States, this weakening of the Canadian dollar results in an inflation of at least 6% in the cost price of their stay expenses in American dollars compared to last winter .
A weakened dollar, who benefits from it?
While a weakened Canadian dollar increases the costs of purchasing in U.S. dollars for citizens and businesses in Canada, it can also make Canadian-origin goods and services less expensive for buyers who can pay in U.S. dollars.
In the opinion of analysts, a prolonged weakening of the Canadian dollar compared to its American neighbor could offset part of the additional costs of possible customs tariffs that American buyers of goods and services would have to pay. Canadian origin.
Likewise, a weakened Canadian dollar can be advantageous for Canadian companies that export goods and services, and which collect these revenues in American dollars before converting them into their accounting currency: the Canadian dollar.
When we consider that the American market absorbs almost 75% – three quarters! – of Canadian exports of goods, and that these exports to the United States represent approximately 25% – a quarter! – of the Canadian gross domestic product, a weakening of the loonie can be advantageous for the production and export sectors of goods and services.
What prospects for the Canadian dollar?
At first glance, not very attractive!
“Times are also tough for currencies like the Canadian dollar which are linked to commodity markets,” notes Jimmy Jean, vice-president and chief economist at Desjardins, in his most recent analysis of “Currency Forecasts” published yesterday. a few days ago.
It was also before the new threats of high customs tariffs against Canada and Mexico announced Monday evening by the next President of the United States, Donald Trump.
“Given its heavy dependence on the American market, the Canadian economy could be among the main victims of American protectionism,” warns Jimmy Jean.
In addition, “Trump’s policies could result in an increase in the production of oil and natural gas in the United States, which would further limit price increases for these products” already very influential on the value of the Canadian dollar.
Furthermore, while the decline in inflation “allows us to anticipate several other interest rate cuts” to the advantage of borrowers in Canada, the chief economist at Desjardins emphasizes that these rate cuts have also increased the gap with interest rates in the United States.
And as long as this gap remains high, the value of the Canadian dollar will be “penalized” on the currency market, around 71 to 72 US cents.
At the National Bank, the chief economist, Stéfane Marion, even put forward the hypothesis that a Canadian dollar could fall between 69 and 70 US cents during the first months of 2025.
If it proves true, such a drop in the value of the Canadian dollar compared to its American neighbor would be the most accentuated since its last two passages around 68 US cents, which date back to 2020 and 2016.
