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A Sinking Dollar: Trudeau’s Latest Legacy
The Canadian dollar has played a significant role in past federal elections, and it wouldn’t be surprising if it does again in 2025. The loonie has been on a downward trend since early last year, reaching its lowest point of 69 cents.
Several factors contribute to the weakening of the Canadian dollar. Commodity prices, which account for over half our export earnings, have declined. Political risk and real interest rates also play a significant role in the currency’s value. 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.
The Trudeau government faces economic challenges, including a declining currency. If the loonie falls further this year, it 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.
The Past: A Lesson for the Future
The Canadian dollar has fluctuated significantly over the years. It hit its all-time low of 61.8 cents in January 2002, resulting from weak commodity prices and global uncertainty following the September 2001 attack on the U.S. After a resource boom and continued fiscal responsibility brought our dollar back up to parity during the Harper years, it fell to below 80 cents when commodity prices collapsed after October 2014.
Factors Contributing to the Weakening of the Canadian Dollar
Commodity prices play a significant role in the currency’s value, as resources account for over half our export earnings. Political risk also contributes to the weakening of the loonie. 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 puts pressure on our dollar as investors become more concerned about our ability to service that debt. The IMF expects Canada’s balance of payments to weaken further even well beyond this year.
What’s Next?
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.
The Trudeau government faces significant economic challenges, including a declining currency. If the loonie falls further this year, it will be another negative in Justin Trudeau’s legacy.
