Why Is the Canadian Dollar So Weak? An Analysis

The Canadian dollar, often called the “loonie,” is a major global currency. Its strength or weakness directly impacts Canada’s purchasing power and international trade. A stronger loonie means Canadians can purchase more foreign goods, while a weaker dollar makes imports more expensive and exports more competitive. The loonie’s value is influenced by a complex interplay of economic and global factors. It is frequently categorized as a “commodity currency” due to Canada’s substantial natural resource exports.

Commodity Price Sensitivity

Canada’s economy relies heavily on its vast natural resources, making its currency sensitive to global commodity price fluctuations. The country is a major exporter of crude oil, natural gas, metals, and agricultural products. Energy products alone accounted for 27% of Canada’s merchandise exports in 2022, with oil and oil-based products dominating these revenues.

Fluctuations in commodity prices directly impact Canada’s export revenues. For instance, when global crude oil prices decline, Canada’s export earnings decrease, reducing demand for the Canadian dollar and contributing to its depreciation. The relationship between the Canadian dollar and oil prices, specifically West Texas Intermediate (WTI) crude, has historically shown a strong correlation: as oil prices rise, the Canadian dollar tends to appreciate against the U.S. dollar. However, some recent analyses suggest this correlation may have diminished, with higher oil prices sometimes associated with a depreciating Canadian dollar, partly due to discounted prices Canadian producers receive for their oil.

Monetary Policy and Interest Rate Gaps

The Bank of Canada (BoC) plays a central role in influencing the Canadian dollar’s value through its monetary policy decisions, particularly by setting the target for the overnight rate. This policy rate affects borrowing costs across the economy, including mortgage rates, and aims to control inflation, stabilize the economy, and foster employment growth. Higher interest rates can attract foreign investment seeking better returns, increasing demand for the Canadian dollar and strengthening its value.

A significant factor impacting the Canadian dollar’s value is the “interest rate differential” between Canada and other major economies, primarily the United States. As of July 2025, the Bank of Canada’s benchmark interest rate was 2.75%, while the U.S. Federal Reserve maintained its federal funds rate in a range of 4.25%-4.50%. This difference, where Canadian rates are lower than U.S. rates, makes investing in Canadian assets less attractive relative to U.S. assets. Such a divergence can lead to capital outflow from Canada, as investors move funds to jurisdictions offering higher returns, consequently weakening the Canadian dollar.

The Bank of Canada has implemented rate cuts more aggressively than the U.S. Federal Reserve, with the BoC cutting its policy rate by 2.25 percentage points through seven consecutive decisions leading up to July 2025, while the Fed held rates steady. This policy divergence is partly due to the Canadian economy’s greater sensitivity to interest rates, influenced by factors such as shorter mortgage refinancing terms and higher household debt levels compared to the U.S.

Domestic Economic Health

The overall health of Canada’s domestic economy significantly influences investor confidence and the Canadian dollar’s value. Key economic indicators such as Gross Domestic Product (GDP) growth, employment figures, and consumer spending provide insights into the economy’s underlying strength. For instance, Canada’s GDP expanded by 0.50% in the first quarter of 2025, though growth in the second quarter of 2024 was substantially driven by government spending, and per-capita output continued to decline for several consecutive quarters when accounting for rapid population growth.

Slower economic growth relative to other major economies can signal a less attractive investment environment, leading to reduced foreign investment and a weaker Canadian dollar. The unemployment rate in Canada decreased to 6.90% in June 2025, yet this improvement was primarily driven by slow hiring rather than a reduction in layoffs. Consumer spending has also shown signs of weakness, with a significant slowdown observed in the second quarter of 2025, particularly in goods spending. High household debt levels and the impact of rising mortgage costs, where payments for renewing mortgages could increase by 22% on average in 2025 and up to 32% by 2026, also weigh on consumer spending and economic stability.

Global Financial Dynamics

Broader global economic trends, geopolitical events, and shifts in investor risk appetite also exert considerable influence on the Canadian dollar. The CAD is often characterized as a “risk-on, risk-off” currency, meaning its value can be affected by global sentiment towards risk. During periods of heightened global uncertainty or financial crises, investors typically move capital into “safe-haven” currencies like the U.S. dollar, Japanese yen, or Swiss franc. This flight to safety reduces demand for currencies associated with commodity markets, thereby weakening the Canadian dollar.

Global trade relations and geopolitical tensions can further impact the Canadian dollar. For example, the threat of U.S. tariffs can introduce uncertainty and negatively affect the Canadian economy, putting downward pressure on the loonie. A strong U.S. dollar globally, driven by factors such as higher interest rates or its safe-haven status, inherently places downward pressure on other currencies, including the Canadian dollar. Conversely, a weakening U.S. dollar can allow the Canadian dollar to gain ground, especially if the Bank of Canada maintains its interest rates longer than the Federal Reserve.