Over the last decade, the Canadian dollar (CAD) has been on a steady decline against the U.S. dollar (USD). On February 3, 2025, CAD dropped to just 67 cents USD, marking its lowest point since 2003. This drop coincided with the resignation of Prime Minister Justin Trudeau and was further exacerbated by the announcement of new U.S. tariffs on Canadian imports by President Donald Trump.
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Interest Rates: A Major Influence on the Canadian Dollar
Historically, the Bank of Canada has closely followed interest rate trends set by the U.S. Federal Reserve. However, in recent months, this correlation has weakened. In April 2024, Canada’s interest rate was 5%, but by early 2025, it had dropped to 3%, a shift confirmed by Bank of Canada Governor Tiff Macklem.
Will the Bank of Canada Cut Interest Rates Further?
During a recent press conference, Governor Macklem acknowledged that monetary policy alone cannot counter the economic consequences of a prolonged trade conflict. He emphasized that Canada’s economic output may shrink, and productivity could decline if tariffs remain in place. The Bank of Canada’s approach to further rate cuts will depend on key economic indicators such as inflation and unemployment.
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Unemployment and Economic Growth: A Stark Contrast Between Canada and the U.S.
One of the significant differences between Canada and the U.S. economy is unemployment. In February 2025, Canada’s unemployment rate stood at 6.6%, compared to just 4% in the U.S. A strong U.S. job market provides stability to the American economy, while Canada faces the challenge of job losses, particularly if tariffs lead to increased prices and lower consumer confidence.
If the Canadian government retaliates with tariffs on U.S. imports, inflation may rise, further eroding consumer spending power and economic growth. This uncertainty makes it difficult for the Canadian dollar to recover significantly in the short term.
Canada’s Trade Relationship with the U.S.: A Crucial Factor
The U.S. is Canada’s largest trading partner, with Canada importing $349.4 billion from the U.S. in 2024 while exporting $412.7 billion. The trade surplus is primarily driven by Canada’s abundant natural resources, including oil and gas. However, if trade conflicts escalate, this surplus may shrink, putting additional pressure on CAD.
Another key economic indicator is GDP per capita. In 2013, both Canada and the U.S. had a GDP per capita of approximately $52,000. By the end of 2023, Canada’s GDP per capita had increased marginally to $53,400, while the U.S. surged ahead to $82,700. This widening gap suggests that Canada’s economic growth has lagged behind its southern neighbor.
The Role of the Carbon Tax and Government Debt
How Does Canada’s Carbon Tax Affect the Economy?
Canada’s carbon tax has been a controversial policy, contributing to higher fuel prices. In early 2025, the cost of a liter of gasoline in Canada was $1.05, compared to $0.90 in the U.S. Approximately $0.12 per liter in Canada is due to carbon taxes. These policies were among the factors contributing to Trudeau’s declining popularity before his resignation.
Government Debt: Canada vs. the U.S.
As of late 2024, U.S. federal debt had exceeded $36 trillion, with an annual GDP of $29.1 trillion. In contrast, Canada’s annual GDP stood at $2.2 trillion, with a government debt of $1.5 trillion. While Canada’s debt-to-GDP ratio is relatively lower than the U.S., the country still faces challenges in setting sustainable monetary policies.
Inflation: Is Canada Headed for More Price Hikes?
As of early 2025, Canada’s inflation rate remains below 2%, significantly lower than the 3% inflation rate in the U.S. However, inflationary pressures could increase if tariffs escalate, pushing up the cost of imported goods and reducing consumer purchasing power.
Canada’s Oil & Gas Industry: A Key Driver of the Loonie’s Strength
Canada is the world’s fourth-largest oil producer, and its energy sector plays a crucial role in supporting the economy. However, a report from Reuters highlighted concerns that Canadian oil companies lack comprehensive strategies to decarbonize. The government must attract approximately $140 billion annually in investment to achieve net-zero emissions, which could impact energy sector growth and, in turn, the Canadian dollar.
Forecast: Will the Canadian Dollar Strengthen in 2025?
Due to ongoing economic uncertainty, experts predict that the Canadian dollar will struggle to gain strength in 2025. In January, options and futures markets indicated concerns about further CAD depreciation. Analysts at ING projected that if trade conflicts worsen, CAD could drop to 66 cents USD. However, RBC Capital Markets provided a more optimistic outlook, predicting CAD to stabilize around 71 cents USD by late 2025.
Key Dates to Watch
- April 2, 2025 – Trump is expected to finalize trade policies, which could significantly impact CAD’s performance.
- October 2025 – Canada’s federal elections, which may lead to a shift in economic policies.
The Role of Canada’s Upcoming Election
With Trudeau’s resignation, the political landscape in Canada is shifting. Former Bank of England Governor Mark Carney has been suggested as a potential candidate for prime minister. However, Pierre Poilievre, leader of Canada’s Conservative Party, is currently the frontrunner. His economic policies, including potential changes to the carbon tax and trade strategies, will play a crucial role in shaping CAD’s trajectory.
Conclusion: A Pivotal Year for the Canadian Dollar
The Canadian dollar’s performance in 2025 will be influenced by multiple factors, including trade policies, interest rates, unemployment, and inflation. While uncertainties remain, Canada’s natural resource wealth and potential political changes could provide opportunities for economic recovery. However, in the short term, CAD is likely to remain volatile, with the potential for further depreciation if economic and political challenges persist.
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