Canadian Dollar Weakens Amid Economic Concerns
The Canadian dollar (loonie) has fallen to its lowest level in two years against the U.S. dollar, trading 0.2% lower at 1.3945 USD/CAD, or 71.71 U.S. cents. This drop comes as it touched an intraday low of 1.3967, marking its weakest point since October 2022.
U.S. Economic Policy Drives Strength of the Dollar
The decline of the loonie is largely attributed to inflationary U.S. economic policies that have bolstered the greenback. Expectations surrounding U.S. President-elect Donald Trump’s potential implementation of inflationary import tariffs are contributing to the strengthening of the U.S. dollar, which recently reached a six-month high against a basket of major currencies.
Yield Discrepancies Affect Currency Strength
The yield on Canadian 10-year bonds rose by 8.9 basis points to 3.271%, but the gap between Canadian and U.S. bond yields has widened. The U.S. yield remains approximately 116 basis points higher, the largest spread recorded since 1995. Amo Sahota, director at Klarity FX, noted, “The widening yield spread is hard to argue against and will keep the loonie on the ropes.”
Trade Relations and Future Outlook
Despite concerns over protectionist trade measures that could impact Canada, the energy sector remains optimistic that Canadian oil imports will not face tariffs, as many U.S. refineries depend on these supplies. Additionally, Canada is taking steps to resolve labor disputes at its major ports, aiming to mitigate economic damage and maintain strong trading relationships.
Market Reactions and Implications
As the Canadian dollar continues to struggle against its U.S. counterpart, analysts suggest that the loonie’s performance reflects broader trends affecting other G10 currencies. The implications of U.S. economic policy and the evolving political landscape in the U.S. will likely play significant roles in the loonie’s future trajectory.
