TLDR
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The Canadian dollar hit a 22-year low on January 31 2025, the day the 25% tariffs with the United States were set to be imposed
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While the decline was seemingly sudden, the dollar’s trajectory was predicated on more than just tough trade talks, such as consumer debt and interest rates
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Recovery could be slow, even if tariffs issues are settled, due to anticipated cuts to interest rates by the Bank of Canada
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Businesses, investors and consumers should operate under the assumption that a weaker Canadian dollar is the new normal, at least for the next few months
The Canadian dollar has seen a rapid decline since President Trump’s first tariffs threats in January, but the currency is poised to further trail the greenback regardless of trade policy, with significant implications for Canadian businesses, consumers and investors.
In recent months the dollar has seen steep declines following the election of Donald Trump, his threat to impose a 25% tariffs on Canadian imports, the Federal Reserve’s announcement that it would slow its rate cutting cycle in December, and in the run-up to the original January 30 tariff deadline.
In October of 2024 the Canadian dollar was trading at $0.74 U.S. After the American election, it dropped to $0.72. After the Fed’s December decisions, it fell below $0.70 for the first time since the COVID outbreak in early 2020. On January 31—the day 25% tariffs were set to be imposed, before a last minute delay—the Canadian dollar hit a 22-year low of $0.68 USD.
How we got here
While the decline was seemingly sudden, its trajectory was predicated on a lot more than just tough talk on trade and won’t see an equally dramatic recovery even if trade talks prove productive, says George Davis, RBC’s Managing Director of Fixed Income, Currencies & Commodities in Capital Markets.
“One of the interesting themes that we’ve seen over the last couple of years has been the general outperformance of the U.S. economy relative to the Canadian economy in terms of economic growth,” he explains. “A lot of that has been fueled by the consumer; the U.S. consumer has been much more resilient in this higher interest rate environment.”
Davis explains that Canadian consumers are carrying a much higher debt load, which is weighing on domestic spending. As of the third quarter of last year Canadians were managing an average of $1.75 of debt for every dollar they earned. South of the border, meanwhile, income growth outpaced borrowing in Q3, reaching $0.82 cents for every dollar earned. “The carrying cost of that debt has really just sidelined the [Canadian] consumer in terms of spending activity,” Davis explains.
Another key factor diverging the two economies is the impact of recent interest rate hikes. That’s because Americans typically pay a consistent rate through the lifespan of their mortgage, while Canadians renew every few years, making them more susceptible to interest rate hikes.
“Up until a few years ago it wasn’t that significant, because the interest rates had been trending lower,” Davis says. “And then all of a sudden we get into 2022, and we have this very abrupt change wherein rates start to move aggressively higher.”
While those rate hikes had a direct impact on the household finances of Canadian mortgage holders at renewal, the average American hasn’t seen a change to pre-existing debt servicing costs.
“The whole economic divergence theme was in place well before the U.S. election and Trump, and then the threat of tariffs promptly after the election was the nail in the coffin that just pushed risk to a much more heightened level,” Davis adds. “That’s why we’ve had such a sharp move over a very short period of time.”
Forecast for the Canadian dollar
Though the decline was rapid, its recovery could be much slower, even after the tariff issue is settled. That’s because the Bank of Canada is expected to continue cutting interest rates—three more times this year according to forecasts from RBC Economics — while the American Fed is not, furthering the gap between the two economies.
“We do see a little bit more Canadian dollar weakness going through to the middle of the year, and that’s predicated by a continuation of this widening in interest rate differentials,” Davis says. “We think that’s going to have a negative impact on currency through the middle of the year, but we think it could turn a little more positive in the second half.”
Davis adds that those assumptions are based on what he refers to as a “moderate and targeted tariff scenario,” whereby the American president does move forward with moderate tariffs but only on specific goods, such as steel, aluminum and lumber. Should those talks devolve, or if blanket tariffs are imposed, the Canadian dollar could decline even further.
Implications of the weak Canadian dollar for businesses and consumers
For the meantime, Davis says Canadian businesses and investors need to operate under the assumption that a weaker Canadian dollar is the new normal, at least for the next few months.
That could be a boon to exporters, who will be able to slash prices and reap greater profits from selling into foreign markets, assuming they aren’t weighed down by new tariffs. Importers, as well as Canadians that intend to travel or shop in the United States, meanwhile, should brace for higher prices, and potentially adjust their plans accordingly.
“That general uncertainty is going to cast a big cloud over the economy,” Davis adds. “There’s going to be a high degree of caution, so businesses aren’t going to be as aggressive in terms of expenditures, capital investments, etc., and consumers might be a little bit more conservative as well.”
Implications for investors
Investors should also brace for higher levels of uncertainty and volatility in the months ahead, and potentially through the entirety of the Trump administration, given the president’s proclivity for using tariff threats as a political tool.
“The currency was more on the backburner in terms of how clients were perceiving the risks that were there, but it’s now moved to the front burner, and it’s starting to boil,” Davis says. “It’s really driven home the point that it’s always good to have a hedging strategy in place to try and protect yourself from some of these adverse outcomes.”
Stay informed with the latest analysis and guidance
Canadians can explore RBC’s thought leadership page to stay on top of new developments, reach out to their banking advisors to discuss risk exposure, or connect with RBC’s Global Fixed Income & Currencies Team to learn more about the currency’s trajectory and its implications.
“Our Hedging Advisory Group, for example, can help you look at what your risks are, get a sense of your tolerance for risk, and then put together some potential risk management and hedging strategies,” Davis says. “This environment is really a call to action to have those discussions, so that you’re not being reactive, but a little bit more proactive.”
