Key Takeaways
- Recent Canadian dollar strength has been underpinned by a sharp depreciation of the US dollar.
- US tariffs’ impact on the Canadian dollar is waning, and Fed rate cuts could boost the currency.
- A range-bound Canadian dollar is seen as likely in the second half of 2025.
Analysts say that, having rebounded sharply in the first half of the year, the Canadian dollar is poised to hold these gains against the US dollar. Reversing a more than 8% decline against the US dollar in 2024, the Canadian dollar has powered its way through US trade shocks and multiple macroeconomic roadblocks.
A strong and stable Canadian dollar has meaningful implications for Canadian investors looking at foreign assets, lowering the value of those holdings. For instance, investments in US dollars would likely decrease in value when converted back to the domestic dollar. On the flip side, a stronger Canadian dollar means investors pay less to buy US stocks, providing an attractive opportunity to diversify a portfolio.
The Canadian dollar had a shaky start to the year, plummeting to C$1.45 in the immediate aftermath of the first wave of tariff announcements, but it bounced back to C$1.36 by July 8.
Currency strategists attribute this recovery in no small part to the weakening US dollar, driven by investor concerns over the health of the US economy and a widespread pivot away from US assets. “Erratic policymaking by the Trump administration, particularly post-Liberation Day [April 2], has seen a growing discount applied to greenback valuations,” says Dr. Nick Rees, head of macro research at Monex Canada.
Still, the roughly 5.5% drop in the US dollar against the Canadian dollar is slightly smaller than the former’s decline against other G10 currencies, which Rees estimates stands at around 7%-8%. And the Canadian dollar is still trading well below its pre-pandemic level, when it was hovering around $1.32, or 75 US cents.
What’s Driving the Canadian Dollar’s Surge?
Sarah Ying, CIBC Capital Markets’ head of foreign exchange strategy, attributes the Canadian dollar’s rebound to US President Donald Trump’s erratic tariff policy and the resulting drag on the US dollar. “Now that tariffs are a global phenomenon, the Canadian dollar has seen some reprieve.”
Having started the year at C$1.44, “the Canadian dollar has strengthened, as Canada is now no longer a focal point for US tariffs,” Ying notes, pointing to how the first wave of tariffs targeted Mexico and Canada.
Thierry Wizman, global foreign exchange and rates strategist at Macquarie Group, echoes that view. “A lot of the CAD’s strength is due to the USD’s overall weakness, [caused by the] flight out of US assets and the US dollar,” he says.
The US dollar posted its worst first half in 52 years, tumbling more than 10% against its global peers in June alone. Analysts anticipate continued headwinds for the US dollar in the second half of the year, “as heightened policy uncertainty and lower federal funds rate expectations have weighed on the greenback,” says Bradley Saunders, North America economist at Capital Economics. However, he points out that the Canadian dollar is still “down slightly against other currencies” since Trump’s inauguration.
The loonie’s ascent was also supported by domestic factors. These include “PM Carney’s pro-growth agenda, his willingness to try to diversify the Canadian economy away from dependence on the US, and his willingness to talk to the US and try to avoid tariffs,” Wizman highlights. The Bank of Canada’s messaging that it’s not in a rush to cut rates also helped.
What’s Next for the Canadian Dollar?
Many currency strategists agree that the loonie is unlikely to stray far from its current range by year-end.
Ying forecasts the Canadian dollar could end the year in the mid-C$ 1.30s, as the tariff-induced ongoing US dollar turbulence wanes.
Wizman sees the Canadian dollar drifting toward C$1.34 by year-end. However, his projection is predicated on the expectation that “the USD will stay soft generally.”
In a similar vein, Rees projects the Canadian dollar to trade around C$1.35 by year-end, “but not before a small retracement higher in the short term, promoted by a second-quarter rebound in US macro data,” driving up the US dollar.
Saunders is an outlier, predicting the Canadian dollar will end the year weaker. His forecast pegs the Canadian dollar at C$1.45, “on the back of slower economic growth and a widening [policy] rate differential with the US, as the Bank of Canada resumes its easing cycle while the Fed remains on hold.”
Forces that Could Sway the Canadian Dollar
A mix of known and unforeseen factors could impact the Canadian dollar’s momentum and cloud its outlook.
For Wizman, they could include “a big drop in oil prices, aggressive rate cuts from the Bank of Canada, or a breakdown in the US/Canada trade relationship.”
Ying says persistent uncertainty emanating from tariffs remains a credible threat. “There is always the risk that at some point these tariffs no longer get delayed, or that tariff threats ramp up if negotiations sour,” she says.
Although tariff uncertainty is now close to fully priced, Rees points to another variable stemming from south of the border: the possibility of faster-than-anticipated Federal Reserve easing. This could further dent the US dollar, which in turn could drive up its northern counterpart. However, the exact impact depends on how the Bank of Canada responds and broader market reactions.
The Bank of Canada and the Loonie’s Flight Path
The Bank of Canada’s governing council has maintained a holding pattern over its last two rate decisions, and with the worst of the trade storm behind, Ying says domestic indicators will take center stage in shaping the central bank’s policy.
Still, market participants are betting on more cuts, though the odds of near-term easing remain low. “A more hawkish Bank of Canada would be supportive of the Canadian dollar, while a dovish Bank of Canada would be a negative,” notes Tom Nakamura, currency strategist and co-head of fixed income at AGF Investments.
If the Canadian economy struggles, forcing policymakers to cut again, it could cause the local currency to depreciate. “Fiscal dynamics and structural economic factors will play a more significant role in the second half of 2025,” Nakamura notes.
Rees argues that if the Fed resumes cuts and the Bank of Canada’s easing cycle ends, “that suggests monetary policy differentials turning supportive for the loonie upside further out.”
Nakamura warns that things can go pear-shaped if the tariff escalation is severe and long-lasting. In that event, he doesn’t rule out the return of the Canadian dollar to YTD highs above C$1.44. However, he says that “the Bank of Canada will react to the root cause of the currency move, namely how damaging it is to the economy and what it means for price stability.”
Indeed, the Bank would be wary of the potential for a renewed Canadian dollar weakening given the tariff implications for goods prices. For that reason, Saunders expects policymakers to “opt for fewer rate cuts this year.” He is currently forecasting two more quarter-point cuts.
What Investors Should be Watching Now
Nakamura thinks that any loonie depreciation means goods and services imported from across the border could become pricier. But on the bright side, a weaker Canadian dollar creates a currency gain on foreign holdings, all else being equal.
Nakamura says, “A well-diversified portfolio that incorporates active currency management can help navigate risks and opportunities.” A strong Canadian dollar helps with this by making foreign assets more affordable.
