The Canadian dollar (CAD) has started 2025 on a challenging note, continuing a downward trend that began in late 2024. As of January 3, the CAD is at its lowest point against the U.S. dollar (USD) in nearly five years. Several economic and geopolitical factors that unfolded in 2024 and persist into the new year have contributed to this depreciation. Let’s explore the key reasons behind the weakening Canadian dollar.
1. Divergent Monetary Policies
One of the primary reasons for the CAD’s decline is the differing monetary policies of the Bank of Canada (BoC) and the U.S. Federal Reserve. In 2024, the BoC implemented a series of interest rate cuts, bringing the benchmark rate to 4.25% to stimulate economic growth. In contrast, the Federal Reserve maintained a more cautious approach, signaling a pause in monetary easing.
This policy divergence has widened the interest rate spread between Canadian and U.S. bonds, making USD-denominated assets more attractive to global investors. The shift in investor preference continues to exert downward pressure on the Canadian dollar as 2025 begins.
2. Political Instability in Canada
Canada’s political environment remains uncertain. In December 2024, the unexpected resignation of the country’s finance minister created instability that has carried into the new year. Investors tend to avoid markets where political uncertainty clouds future policymaking, further weakening confidence in the CAD.
3. Concerns Over U.S.-Canada Trade Relations
Trade relations between Canada and the U.S., a critical pillar of the Canadian economy, face new challenges. Discussions about potential U.S. tariffs on Canadian imports emerged in late 2024, raising concerns about the future of cross-border trade. For Canada’s export-reliant economy, any disruption in trade with its largest partner can have significant consequences, including a weaker currency.
4. Declining Commodity Prices
Canada’s economy and currency are closely tied to global commodity prices, particularly oil. In late 2024, oil prices dropped due to weakening demand from China, the world’s largest importer of crude. This decline has diminished revenues in Canada’s energy sector, contributing to a weaker CAD as the new year begins.
5. Mixed Economic Indicators
Economic data from late 2024 paints a mixed picture for Canada. Inflation eased to 1.9% in November, down from 2% in October, reflecting subdued consumer demand. While GDP grew by 0.3% in October, preliminary data suggests a contraction for November. These indicators suggest that Canada’s economy may be losing momentum, discouraging investment and further weakening the currency.
What Does This Mean for Canadians?
The weaker Canadian dollar has immediate implications for Canadians:
• Higher Import Costs: Goods imported from the U.S. are more expensive, driving up prices for consumers. • Increased Travel Expenses: Canadians traveling to the U.S. will find their dollars stretching less.
