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A Sinking Dollar: Trudeau’s Latest Legacy
The Canadian dollar has been on a downward trend, and it wouldn’t be a surprise if it played a role in the upcoming federal election. In fact, the fate of the loonie has influenced past elections, including the devaluation of the "Diefenbuck" during the Diefenbaker government’s term.
The Canadian dollar has fluctuated over the years due to various factors such as commodity prices, political risk, and interest rates. Commodity prices play a significant role in our export earnings, which account for over half of our export income. Political risk also affects the loonie, as well as real interest rates, investors’ preference for American bonds, and increased private and public indebtedness to other countries.
Factors Affecting the Canadian Dollar
Several factors contribute to the weakening of the Canadian dollar:
- Commodity prices: Resources account for over half our export earnings.
- Political risk: The loonie is affected by political instability in Canada, such as the resignation of Chrystia Freeland as finance minister.
- Interest rates: If real interest rates stay higher in the U.S., investors will prefer American to Canadian bonds.
- Debt: Increased private and public indebtedness to other countries puts pressure on our dollar.
What to Expect in 2025
The Canadian dollar is likely to weaken further in 2025 due to:
- Softening oil prices: Falling Chinese demand and an oil supply glut are expected to reduce oil prices.
- Interest rate differences: 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.
- Indebtedness growth: Our indebtedness continues to grow, with the IMF expecting Canada’s balance of payments to weaken further beyond this year.
Trump Tariffs: A Further Blow
If Trump tariffs are applied on his first day in office, expect the Canadian dollar to weaken even further this month. This will soften the tariffs’ impact on Canadian exporters but hurt Canadian importers. U.S. tariffs will also encourage Canadian companies to shift production and capital to the U.S.
A Negative Legacy for Trudeau
The decline of the Canadian dollar is another economic challenge for Canadians, and it’s an area where Justin Trudeau’s government has room for improvement. On top of all their other economic challenges, Canadians don’t want a declining currency as well.
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