Why Is the Loonie Declining in Value, and What Comes Next?

A pedestrian walks past the Bank of Canada in Ottawa, June 10, 2026. The Canadian Press/Adrian Wyld

News Analysis

The Canadian dollar has fallen to its lowest level compared to the greenback in 14 months, nearing 70 U.S. cents, and economists say the loonie could weaken further as Canada’s economy slows and investors continue to favour the U.S. dollar.

The Canadian dollar’s two-month slide coincides with Canada’s entry into a technical recession, expectations that the U.S. Federal Reserve could raise interest rates, relatively lower oil prices, heightened geopolitical uncertainty, and the lack of a deal so far in key trade talks with the United States.

While the economic challenges have contributed to the decline, economists say the biggest driver behind the weaker loonie has been renewed strength in the U.S. dollar, which has climbed against most major currencies in recent months as investors worldwide seek higher returns and safer assets.

“[What’s] really been the main story is that the U.S. dollar itself has been on a bit of a tear for more than two months now,” BMO Financial Group’s chief economist Doug Porter told The Epoch Times. “A lot of it does come down to the fact that there’s this view that the Federal Reserve may in fact raise interest rates either later this year or early next year.”

Domestic factors have also weighed on the loonie, some economists say. The country entered a technical recession after recording two straight quarters of economic contraction, while uncertainty has lingered after Canada and the United States failed to reach a new deal on the Canada–United States–Mexico Agreement (CUSMA) by the July 1 target date.

Oil prices, meanwhile, have given less support to the Canadian dollar than in previous commodity booms.

University of Calgary economist Jack Mintz said that higher oil prices have traditionally strengthened the loonie, but the relationship has been less consistent recently, with oil prices falling and adding to pressure on the Canadian dollar.

The recent slide, though, has not been unique to Canada. Changing expectations about U.S. interest rates have strengthened the U.S. dollar at the expense of all other currencies, Mintz said.

Geopolitical tensions have also contributed to the loonie’s weakness.

Livio Di Matteo, a professor of economics at Lakehead University, said conflict in the Middle East is causing money to “flee to U.S. dollars,” which in turn lowers the value of the loonie.

“The U.S. economy is still growing strongly so the U.S. dollar is still seen as a safe bet in uncertain times,” he said.

Loonie’s Performance

The loonie has fluctuated sharply over the past two years.

It fell from about 74 cents to the U.S. dollar at the beginning of 2024 to 69 cents at the end of the year, as the Bank of Canada began cutting interest rates and then president-elect Donald Trump threatened to impose tariffs on Canadian imports.

The loonie then recovered to about 73 cents in April 2025 as the White House announced “Liberation Day” tariffs on nearly every country except six, including Canada. However, the currency has steadily declined since May 2026, reaching around 70 cents by July.

The recent fall of the loonie coincided with the U.S. dollar strengthening against most other currencies, including the euro, Japanese yen, and British pound.

Porter said the market had expected the new Federal Reserve chair, Kevin Warsh, to continue lowering interest rates, but he “turned out to be a little bit more hawkish than what ... the market was expecting.”

Indeed, inflationary pressures linked to the Iran war have instead caused markets to expect possible rate hikes, which “has supported the U.S. dollar and weighed on the Canadian dollar more broadly,” Porter said.

What’s Next for the Loonie

Porter said the Canadian dollar could weaken slightly from current levels, with the BMO’s currency strategist forecasting it will fall to around 69 U.S. cents. However, he does not see it falling further.

Porter said while he believes the Federal Reserve raising interest rates could lead to further weakness for the loonie, “a lot of bad news is already built into the Canadian dollar” so it may not have a large effect.

While the Bank of Canada raising interest rates to tame inflation would strengthen the value of the loonie, Porter said he sees “little chance” that this will happen for the next two rate decisions, given that Canada’s economy continues to show weakness.

The Bank of Canada has maintained that it faces a dilemma when it comes to interest rates, given that higher inflation from the Iran war is putting pressure on it to raise interest rates, but weaker economic growth due to U.S. tariffs could require it to lower rates.

Porter said a much sharper decline, such as the loonie’s fall to 63 cents like in 2002, would likely require a “new serious negative shock” to Canada’s economy, such as the United States pulling out of CUSMA completely.

While oil prices are once again elevated, the Canadian dollar has not benefitted like it did in the early 2010s, which he believes is due to Canadian exports suffering, Mintz said.

Di Matteo added that the country lacks the production capacity and investment needed to fully benefit from stronger commodity prices.

“Despite the demand for oil, we really do not have the capacity in place to supply it, so the effects are small,” he said.

The Bank of Canada said in its April Monetary Policy Report that the loonie had moved less than in previous oil price surges because of “expectations that the increase in oil prices will be short‑lived,” as well as increased demand for “safe-haven assets due to the war.”

The bank said that the relative stability of the Canadian dollar had helped preserve the competitiveness of Canada’s non‑commodity exports, but has “also meant that higher oil prices are felt more directly by consumers.”