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The fate of the Canadian dollar has played a role in past federal elections so it wouldn’t be a big surprise if it did in 2025’s, too. The most famous instance was the devaluation of the ‘Diefenbuck.’ With the Canadian economy weakening and the Diefenbaker government fighting over monetary policy with Bank of Canada governor James Coyne, not only did our dollar sink — from parity to 92.5 U.S. cents, where it was fixed in 1962 in an agreement with the IMF — but so did the fortunes of the Diefenbaker government, which eventually lost office in 1963.
After reaching US$1.04 in 1974, the loonie slid to 69.1 cents in 1986, reflecting growing deficits, lower commodity prices and the threat of Quebec separation. It hit its all-time low of 61.8 U.S. cents in January 2002, the result of weak commodity prices and global uncertainty following the September 2001 attack on the U.S.
After a resource boom and continuing fiscal responsibility brought our dollar back up to parity during the Harper years, it fell to below 80 U.S. cents when commodity prices collapsed after October 2014. Since 2018, it has fluctuated around 75 cents but has trended down once again since early last year. After Chrystia Freeland resigned as finance minister, it dipped below 70 cents, as political turmoil loomed.
Several factors cause the Canadian dollar to weaken. Commodity prices play a big role: resources account for over half our export earnings. So does political risk. And if real interest rates stay higher in the U.S., investors will prefer American to Canadian bonds. Increased private and public indebtedness to the rest of world also puts pressure on our dollar as investors become more concerned about our ability to service that debt.
Expect the Canadian dollar to weaken further in 2025. Oil prices are likely to soften due to falling Chinese demand and an oil supply glut. The U.S. Federal Reserve is not expected to cut interest rates as much as the Bank of Canada has felt necessary, given our weaker economy and lower inflation forecasts. And our indebtedness continues to grow — with the IMF expecting Canada’s balance of payments to weaken further even well beyond this year.
Then there are the Trump tariffs. Should they actually be applied on Trump’s first day in office, as he has threatened, expect the Canadian dollar to weaken even further this month. That will soften the tariffs’ impact on Canadian exporters but will hurt Canadian importers. U.S. tariffs will also encourage Canadian companies to shift production and capital to the U.S. rather than try to keep exporting from Canada, which is of course the goal of Trump’s mercantilist policies.
If the loonie falls further this year, that will be another negative in Justin Trudeau’s legacy. On top of all their other economic challenges, Canadians don’t want a declining currency, too.
