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International tensions have turned the Canadian dollar into a punching bag for market volatility, with sharp swings driven by tariff announcements and uncertainty over US-Canada trade relations. Analysts warn that unless this uncertainty subsides, the Canadian dollar could remain on shaky ground for the foreseeable future.
The Canadian dollar fell back to C$1.45 against the US dollar on March 4, just days after recovering to C$1.42, as US President Donald Trump launched a trade war with Canada and other nations, imposing sweeping 25% levies on Canadian exports. On March 6, the loonie rose back to C$1.42, responding again to the day’s tariff news.
In addition to a fragile economy, investors are struggling with trade policy uncertainty as tariffs are imposed and then swiftly reversed. After a 30-day exemption expired on March 4, sweeping 25% tariffs on Canadian goods came into effect, rattling markets and investor sentiment. The next day, Trump paused levies on Canadian carmakers, and on March 6, he suspended tariffs on select Canadian goods exported under USMCA until April 4.
Beyond trade concerns, Canadian currency remains under pressure from weak economic growth, high unemployment, and a widening policy gap between the Bank of Canada and the US Federal Reserve. Over 2024, the currency slid nearly 8% against the US dollar, dropping from C$1.33 at the start of the year to a two-decade low of C$1.44 by year-end. It has since hovered around that level, fluctuating between dips and rebounds as volatility ebbs and flows.
“Volatility will remain high in the foreign exchange market, with the Canadian dollar staying low in the next few months,” says Tu Nguyen, economist at RSM Canada. “During global economic uncertainty and crises, the US dollar often gains value as a safe-haven currency in relation to other currencies.”
Tariffs Are Here. What’s Next?
CIBC Capital Markets head of foreign exchange strategy Sarah Ying says the amount of time tariffs are in place will be key. “Now that tariffs are implemented, the biggest question is whether they will be permanent,” she says. “It seems the market is betting against a scenario where these ultra-punitive tariffs will be held in place.” Indeed, the loonie jumped back to C$1.42 immediately after Trump granted Canadian and Mexican automakers a one-month exemption from the 25% tariffs on March 5. This suggests markets may already doubt the longevity of Trump’s punitive trade policies.
Meanwhile, the Canadian dollar isn’t the only currency reacting to the tariffs. The US dollar has been under pressure due to the volatility triggered by trade taxes. “The market is also beginning to punish the USD for tariff uncertainty, so the impact for USD/CAD may not be that bad,” says Ying. The day after tariffs took effect, the loonie rebounded to C$1.43 from $1.45, as the US dollar hit a three-month low on concerns about tariff-driven risk to growth.
Full Impact of Tariffs Yet to Be Seen
Peter Dragicevich, currency strategist at Corpay Cross-Border Solutions, believes the full impact of tariffs on the US dollar is yet to materialize. “In contrast with the loonie, where a lot of damage has already been priced in, the US dollar has yet to fully incorporate the downside risks that Trump’s policies are creating,” he says.
Investor sentiment toward the US economy has deteriorated, according to Mirza Shaheryar Baig, foreign exchange strategist at Desjardins. There is “growing evidence that tariff uncertainty is negatively impacting US business and consumer confidence,” he says. “This has weakened support for the US dollar, which has declined by 1.5% in broad trade-weighted terms compared to last month.”
Yet the Canadian dollar is expected to remain vulnerable to Trump’s confusing trade policies. “Hopes for a relatively quick resolution could fade if the Trump administration fails to heed market signals in the coming days,” says Dragicevich, warning that “pessimism on the economic outlook could deepen.”
How Low Can the Loonie Go?
The Canadian dollar has been sliding against its US counterpart for nearly a year, prompting analysts to issue bleak forecasts for its performance in 2025. The projections range from C$1.45 to C$1.50, depending on the macroeconomic factors.
“The Canadian dollar is already relatively cheap as a result of many years of depreciation versus the US dollar,” notes Thierry Wizman, global FX and rates strategist at Macquarie. He says the Canadian dollar will likely float between the lower bound of C$1.50 against the US dollar if tariffs prove sticky and the upper bound of C$1.35 “if tariffs are avoided and Canada can still derisk its economy.”
Ying’s base case sees the loonie at C$1.45 in the first half of the year, rising to C$1.42 by year-end. However, she thinks that if the trade tariffs linger in their current size and scope, the Canadian dollar could fall to as low as C$1.50, hovering around the high C$1.40s.
Some currency experts point out that multiple variables are in the mix, making any prognostication about the Canadian dollar tricky. “Forecasting the trajectory at this juncture is fairly futile, [because] there are too many unknowables to grapple with in the near term,” says Dragicevich. He says that with a quick reversal of tariffs, the Canadian dollar could rally into the high C$1.30s. However, “currency markets tend to overshoot, and a psychological ‘doom loop’ could easily gain momentum, dragging the currency through C$1.50 and perhaps toward the C$1.55 mark.”
A weaker dollar could have strategic value for an export-oriented country like Canada. “The lower 10% tariff rate levied by the US, coupled with the decrease in the value of the Canadian dollar, might buffer the demand hit for Canadian energy,” Nguyen contends.
What It Means for the Markets
An emerging trend could create a tailwind for the Canadian dollar: the market’s growing tolerance for tariff trauma.
“The market is no longer as sensitive to tariff headlines as before, and it is also beginning to punish the US dollar,” says Ying. “It is quite possible that the market is looking for its new shiny toy, which we believe is the waning of US exceptionalism keeping the US dollar strong.” For the economy, though, it would depend on how long these tariffs last. “A six-month implementation of 25% tax [on Canadian goods] and 10% [on energy products] will likely cost around 2.5% to Canadian GDP, more if it lasts longer,” she adds.
Avery Shenfeld, chief economist at CIBC, contends that the loonie has been propped and protected by market doubts about whether the trade war will last. “But if, as we expect, no immediate ceasefire is forthcoming, we would expect to see some further Canadian dollar depreciation in the weeks ahead,” he wrote in an investor note. If the tariffs persist beyond a couple of quarters, they could throttle Canada’s exports and force the Bank of Canada into rate cuts, which “could put further pressure on the Canadian dollar if markets started to believe that the tariffs were permanent.”
Notably, the Canadian dollar’s sensitivity to tariffs is abating due to doubts about their longevity. Shenfeld thinks this could prevent a precipitous fall in the currency’s value. For now, he rules out the possibility of the loonie falling to the C$1.50 range. “We would instead anticipate a move back into the low C$1.40s if calmer waters are restored,” he says.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
