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The Canadian dollar soared 0.7% on Friday trading at C$1.39, posting the biggest gain in five months against the US dollar as the greenback fell across the board.
“The Canadian dollar strength has more to do with the US and the rest of the world than anything specific to Canada,” says Tom Nakamura, currency strategist and co-head of fixed income at AGF Investments. “With an escalating tariff war between China and the US, concerns have grown about the attractiveness of US assets in both the short term as well as the long run.”
But while the Canadian dollar has gained in recent days, the outlook is less clear. With US President Donald Trump’s trade wars threatening to upend not just the Canadian economy but also those of the United States and other major countries, analysts are offering a range of outlooks for the battered Canadian dollar.
Some point to improving market sentiment, stronger domestic economic data, and a weaker US dollar as reasons the loonie could strengthen after its recent declines. Others cite a slowdown in the US economy, the increasing likelihood of a recession in both Canada and the US, and divergent monetary policies as reasons for why the loonie will continue to sink.
The common sentiment: Canadians should expect the value of the dollar to remain volatile as long as the trade wars continue.
The Canadian Dollar’s 2025 Drop
At the start of the year, the Canadian dollar traded at C$1.44 against the US dollar, dipping to a low of C$1.46 in early February. It has since rebounded to current levels after Canada avoided reciprocal taxes from the US amid a widening global trade war. The loonie’s movements have been closely tied to global capital markets, with investor concerns over US tariffs causing significant market volatility.
Stock markets have been gyrating particularly violently since the US tariffs were announced last Wednesday. In the ensuing global selloff, the Morningstar US Market Index fell more than 20% and the Morningstar Canada Index retracted 10% from their Feb. 18 peaks this year. The steep drop is reflective of a full-scale risk-off sentiment coursing through the market.
Now, currency experts primarily focus on the outlook for US economic growth and interest rates.
US Economy a Key Factor in the Canadian Dollar’s Outlook
Currency experts cite the dimming outlook for the US economy as a key factor influencing the value of the Canadian dollar.
“The big story in the market now is the repricing of US growth,” says Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets. “The market expects the US economy to slow down amid tariff uncertainty, so that’s what’s been driving the USD/CAD [exchange rate].” She adds that with the expectation of a US economic slowdown, the market anticipates four Federal Reserve interest rate cuts in 2025 (at the start of the year, just one was predicted).
The relative strength of the loonie is also a function of recent US dollar weakness, according to Jonas Goltermann, deputy chief markets economist and head of the FX markets service at Capital Economics. Trump’s extraordinary “Liberation Day” announcement, which rattled markets worldwide, “also put paid to the idea that his aggressive tariff plan would result in a stronger [US] dollar,” he wrote in a note to investors. “Instead, the greenback has dropped sharply on intensifying fears of a US recession and a broader unwind of US financial market exceptionalism.” He adds that while the magnitude of Trump’s reciprocal tariffs was greater than anticipated, even more surprising was the US dollar’s drop in response.
Noah Buffam, associate, FICC strategy, fixed income, currency & commodities at CIBC Capital Markets, forecast the US dollar/Canadian dollar selloff to continue, though marked by a gentler depreciation of the US dollar relative to its Canadian counterpart.
“For Canada’s economy, the selloff in US dollar/Canadian dollar is not going to be a major factor,” he adds. “On the margin it makes Canada’s exports slightly more expensive for the US, but at these levels the US dollar remains strong versus history.”
Global Risk Sentiment and the Canadian Dollar
Some observers argue that extreme market volatility and heightened risk perception also weigh heavily on the loonie. “The Canadian dollar is now mainly dancing to a tune played in global capital markets,” says Karl Schamotta, chief market strategist at Corpay. “With investors running scared as the Trump administration works to overturn the global trade order, currency markets are responding to rapid shifts in growth trajectories, monetary policy expectations, and overall risk appetite, as opposed to shifts in domestic fundamentals.”
Tom Nakamura, currency strategist and co-head of fixed income at AGF Investments, expresses a similar view. He says that “most of the recent USD/CAD moves have been driven by broader risk sentiment” around the global economy. He thinks any escalation in global growth concerns could drag the Canadian currency as much as C$1.50 against the US dollar. “While north of C$1.50 is possible, we think the market will find such levels attractive to rotate away from US dollar to other currencies,” he explains.
BMO chief economist Douglas Porter says the size of reciprocal tariffs caught the world by surprise, as traders hadn’t priced in a risk of that magnitude. “The US dollar seesawed on the news, initially falling hard in the wake of the tariff announcement—including its biggest daily loss in three years on Thursday,” he wrote in an analyst note. However, he says the resultant and relentless drop in equities led to a more traditional flight to safety, bolstering the greenback.
The Canadian dollar could come under additional pressure, if trade tensions mount further, though the scope matters. “If the dispute is only between the US and Canada, the Canadian dollar likely goes up, with C$1.44 or C$1.45 a realistic target,” says Ying. “If the dispute is broad based and involves many US trading partners, [the loonie] likely goes lower as the market will continue to price in the wane of US [economic dominance].” On the other hand, if retaliation from trading partners is worse than anticipated, Ying forecasts the Canadian dollar could strengthen to the C$1.30 range.
Schamotta sees C$1.40 as the resistance level. If the loonie gains past that, it could keep getting stronger. However, he warns that “another break of the C$1.45 threshold might open room for further downside in the event that Trump turns his sights on Canada again.”
What Bank of Canada Policy Could Mean for the Loonie
Analysts say the Bank of Canada is unlikely to be overly concerned about currency devaluation, given more pressing economic concerns. “Any [central bank] response would not be related to US dollar/Canadian dollar fluctuations,” says Ying. “It would be about trade tensions and their impact on investment and consumption in the face of uncertainty.”
Worsening consumer, investor, and business sentiment would be policymakers’ main concern. This is because the Bank knows that “even if we see another strong data cycle, a US growth slowdown will reprice Canadian growth as well, so the Canadian dollar’s downside is limited,” says Ying.
The gap between the central bank’s monetary policy on either side of the border could also influence the Canadian dollar. “A continued narrowing in cross-border rate differentials—perhaps supported by a more cautious Bank of Canada—could [make the loonie stronger],” Schamotta notes, but warns that “the headwinds facing the Canadian economy and the loonie remain quite severe.”
Nakamura estimates that the Bank of Canada is likely to focus more on the prospect of “recession in Canada, and may respond to that.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
