The Canadian dollar (CAD) has faced significant headwinds in 2024, steadily losing ground against the U.S. dollar (USD). For many Canadians, the weakening loonie is becoming a growing concern as it impacts everything from the cost of imported goods to international travel. As the Bank of Canada continues to implement interest rate cuts, questions remain about the future of the USD/CAD exchange rate and what this means for the Canadian economy. This article dives into the factors behind the Canadian dollar’s decline and offers insights into its potential path forward.
The Current State of the USD/CAD Exchange Rate
As of October 2024, the USD/CAD exchange rate has moved to 1.38, meaning that one U.S. dollar is equivalent to 1.38 Canadian dollars. This represents a significant depreciation from the start of 2024 when the exchange rate stood at 1.30. For Canadians, this means that the U.S. dollar is now more expensive, leading to higher costs for imported goods, travel, and foreign investment.
Several key factors are driving this depreciation, most notably the divergence in monetary policies between the Bank of Canada (BoC) and the Federal Reserve (Fed). As the BoC embarks on a series of interest rate cuts to stimulate the Canadian economy, the Fed has kept its policy rate higher for longer, strengthening the U.S. dollar against most major currencies, including the CAD.
The Bank of Canada’s Interest Rate Cuts and Their Impact
The Bank of Canada has been aggressively cutting interest rates throughout 2024 to counteract a weakening domestic economy. After raising rates sharply in 2022 and 2023 to combat inflation, the BoC has now pivoted to a more accommodative stance, with two rate cuts already implemented and more expected by the end of the year.
The BoC’s overnight rate is now expected to fall to 2% by mid-2025, down from 4.5% at the start of the year. These rate cuts are designed to support economic growth by making borrowing cheaper for businesses and consumers. However, they also reduce the yield on Canadian assets, making the Canadian dollar less attractive to foreign investors. As a result, capital flows into Canada have slowed, putting additional pressure on the loonie.
In contrast, the U.S. Federal Reserve has taken a more cautious approach. While inflation in the U.S. has moderated, the Fed has maintained a higher policy rate to ensure that inflation does not reignite. This has helped bolster the U.S. dollar, as higher interest rates make U.S. assets more appealing to global investors seeking higher returns.
This divergence in monetary policy has been a key factor in the widening gap between the USD and CAD, as investors move their capital into U.S. dollar-denominated assets, which offer higher yields than their Canadian counterparts.
Weak Economic Growth in Canada Adds to Pressure
Another factor contributing to the Canadian dollar’s decline is Canada’s sluggish economic growth. In 2024, GDP growth has underperformed, tracking at an annualized rate of just 1% in the third quarter, well below earlier expectations. Weak productivity growth, slowing population growth, and rising unemployment have all contributed to the economy’s underperformance.
Slower economic growth makes Canada a less attractive destination for foreign investment, further weakening demand for the Canadian dollar. Investors tend to favor countries with stronger growth prospects, as these offer better opportunities for returns. With Canada’s economic outlook remaining subdued, many investors have chosen to reduce their exposure to Canadian assets, adding downward pressure on the currency.
The decline in commodity prices—particularly for oil, a major export for Canada—has also played a role. While energy prices surged in previous years, they have moderated in 2024, reducing one of the key revenue streams for Canada. Lower oil prices have had a negative impact on the country’s trade balance, further weakening the Canadian dollar.
Global Economic Uncertainty and Safe-Haven Demand for the U.S. Dollar
Another key reason for the Canadian dollar’s decline is the broader global economic uncertainty that has increased demand for the U.S. dollar as a safe-haven currency. The U.S. dollar tends to strengthen in times of uncertainty, as investors seek the stability and liquidity that the U.S. financial markets provide.
In 2024, several global risk factors—such as geopolitical tensions, slowing global growth, and volatile commodity prices—have led investors to increase their holdings of U.S. dollars. As a result, the CAD has suffered in comparison, as it is seen as a more risk-sensitive currency.
The Canadian dollar is particularly vulnerable to global economic shocks due to its heavy reliance on exports, especially commodities like oil, natural gas, and lumber. When global demand for these commodities weakens, the Canadian economy—and by extension, the CAD—tends to suffer. With global demand slowing and trade uncertainties persisting, the Canadian dollar has struggled to maintain its value against the USD.
How the Weak Canadian Dollar Affects Consumers and Businesses
The decline in the Canadian dollar has several implications for both consumers and businesses:
- Higher Import Costs: As the CAD weakens, the cost of imported goods, particularly from the U.S., increases. This affects everything from consumer electronics to food products, raising prices for Canadian households. Businesses that rely on imported materials and goods also face higher input costs, which can squeeze profit margins and lead to higher prices for consumers.
- Travel Costs: For Canadians traveling abroad, particularly to the U.S., a weaker Canadian dollar makes travel more expensive. The increased cost of accommodation, dining, and shopping can deter Canadians from traveling or force them to cut back on spending while abroad.
- Export Competitiveness: On the positive side, a weaker CAD can boost Canada’s export competitiveness. Canadian goods and services become more affordable to foreign buyers, particularly those in the U.S. This can help support Canada’s export sector, providing a much-needed boost to economic growth. However, with global demand slowing, the benefits of a weaker currency for exports may be limited in the current environment.
- Inflationary Pressures: A weaker Canadian dollar can also contribute to inflationary pressures, as higher import costs feed through to consumer prices. While inflation in Canada has eased significantly in 2024, the weakening CAD could slow the pace of disinflation, particularly if energy prices rise or global supply chains face renewed disruptions.
Forecast for the Canadian Dollar: What Lies Ahead?
Looking ahead, the outlook for the Canadian dollar remains uncertain. The USD/CAD exchange rate is expected to remain elevated in the near term, particularly as the Bank of Canada continues to cut rates and the Federal Reserve keeps its policy rate higher. Many economists predict that the exchange rate could rise to as high as 1.40 by early 2025 before stabilizing.
However, much will depend on the broader economic outlook, both in Canada and globally. If the Canadian economy can begin to recover in the second half of 2025, supported by lower interest rates and stronger demand for exports, the CAD could regain some of its lost ground. Additionally, if global risk sentiment improves, reducing demand for safe-haven assets like the USD, the Canadian dollar could benefit.
On the other hand, continued global economic uncertainty, particularly if the U.S. economy outperforms Canada’s, could keep the Canadian dollar under pressure for an extended period.
Conclusion: Navigating a Weaker Canadian Dollar
The Canadian dollar’s decline against the U.S. dollar in 2024 has been driven by a combination of factors, including monetary policy divergence, weak economic growth, and global uncertainty. For Canadian consumers and businesses, the weaker loonie means higher import costs, more expensive travel, and inflationary pressures. However, the currency’s decline also presents opportunities for exporters, who may benefit from increased demand for more affordable Canadian goods and services.
As the Bank of Canada continues to implement rate cuts, the CAD is likely to remain under pressure, particularly if the U.S. dollar continues to benefit from its status as a safe-haven currency. While the outlook for the Canadian dollar is uncertain, businesses and consumers will need to adapt to a world where the loonie is worth less—at least for now.
