‘Trump trade’ sees loonie fall to four-year low against US dollar

The re-election of Donald Trump has strengthened the U.S. dollar, sending Canada’s exchange rate to a four-year low against the greenback — potentially helping Canadian exporters ride out the effects of tariffs but also pushing up the prices of imported goods.

The loonie has fallen about 2 percent against the U.S. dollar since the election and about 4 percent since September, when financial markets began leaning into the “Trump trade” in anticipation of the Republican candidate’s return to the White House. It is now trading near 71 US cents, down from around 74 US cents in late summer – a level last seen in the early days of the COVID-19 pandemic.

The recent move in the exchange rate is largely a story of US dollar strength, and Canada’s currency has held up better than other major currencies, including the euro and the Japanese yen, which have gotten wiser since Mr. Trump’s re-election.

At the same time, the weak loonie reflects a broader economic malaise in Canada that has prompted investors to focus on opportunities south of the border and pressured the Bank of Canada to cut interest rates faster than the U.S. central bank to avoid a recession. This rate divergence is expected to grow and keep downward pressure on the crap in the coming quarters to the benefit of exporters who become more competitive and to the detriment of Canadian shoppers who have to pay more for goods coming across the border.

“I would see the exchange rate responding more to the various economic performance rather than the economic performance responding to the exchange rate,” Bank of Canada Governor Tiff Macklem said during a Senate committee appearance last month. “The US economy has had stronger growth and, most importantly, it has had much stronger productivity growth than Canada.”

In recent months, global bond and currency markets have been driven by the prospect of Mr. Trump’s return to the White House, along with stronger-than-expected US economic data, has rolled back bets on rapid interest rate cuts by the Fed.

Mr. Trump is promising tariffs, corporate tax cuts and deregulation – a policy mix expected to boost domestic economic growth, increase the US government deficit and boost inflation. Investors have responded by pushing bond yields significantly higher, with the yield on 10-year US Treasuries rising nearly a full percentage point since mid-September.

Higher US interest rates and a rising stock market are drawing in foreign capital, which is bidding up the dollar. There are also two sides to any currency trade, and Mr Trump’s tariff proposal could hurt countries that export to the US, causing their currencies to depreciate. Meanwhile, his “drill, baby, drill” approach to energy production could put downward pressure on oil prices, further weighing on commodity-oriented currencies such as the Canadian dollar.

“The tariffs plus the deregulation and the stimulus and pro-growth policies come first, and those things kind of make the rest of the world weaker,” said Mark McCormick, head of currency strategy for TD Securities.

The Trump trade comes on top of surprisingly strong US economic data. While growth in most advanced economies has slowed to a trickle under the weight of high interest rates, the US continues to produce fairly robust gross domestic product and job numbers, as well as sticky inflation numbers. On Thursday, Fed Chairman Jerome Powell said he and his team are in no rush to cut interest rates.

The picture is very different in Canada, where both inflation and economic growth have surprised to the downside. The Bank of Canada was the first G7 central bank to start cutting interest rates, and it has cut four consecutive times since June, bringing the key rate to 3.75 per cent. from 5 per cent In contrast, the Fed’s interest rate target is currently 4.5 per cent. to 4.75 per cent

“I wouldn’t worry about the Canadian dollar falling on its own. I would worry about the underlying reason why the Canadian dollar has fallen. And that points to consumption and investment weakness and also exports,” says Ke Pang , who is Associate Professor of Economics at Wilfrid Laurier University.

Economists and traders expect the spread between Bank of Canada and Fed rates to continue to widen. Mr. Macklem has said there is a limit to how far the two central banks can diverge. But he has maintained that banks are not close to that limit and that concerns about the Canadian currency’s weakness are not affecting monetary policy.

“The limit has to do with the inflationary consequences of a weak dollar,” said Martin Eichenbaum, an economics professor at Northwestern University in Chicago. “Imagine you really diverge, the nominal exchange really goes down the toilet. Canada has to import goods and inputs for what it does. That will show up as inflation in Canada, which would be the exact opposite of, what Tiff would want, so he balances those two things.”

A 2015 Bank of Canada paper estimated that a 10 percent depreciation of the Canadian dollar increases core inflation by about 0.3 percentage points and headline CPI inflation by 0.6 percentage points. More recent internal estimates are in the same ballpark, a bank spokesman said.

At this point in the economic cycle, inflation, which is below 2 per cent, is not the bank’s main concern. Central bank policymakers have said they are increasingly concerned about downside risks to economic growth and inflation. And here a weaker currency, alongside interest rate cuts, can actually help.

“A weak currency has some clear benefits,” said Eric Lascelles, chief economist at RBC Global Asset Management. “It increases a country’s competitiveness, which one could argue is exactly what the doctor ordered for Canada with a woeful productivity performance. Canadian exports are suddenly cheaper relative to American domestic products.”

Bay Street analysts broadly expect the US dollar to continue to strengthen and the Canadian dollar to slide in the near term. But there are reasons to believe this could reverse in the medium term, said Mr. McCormick from TD. Despite policy proposals that have strengthened the US dollar, Mr. Trump said he would prefer a weaker currency to help American manufacturers and exporters.

“I think we’re going to see the conditions where the dollar strengthens to levels that are extremely uncomfortable and are very disruptive to the entire world. So, in turn, Trump tries to fix that and then takes credit for solving the problem that he created .And that’s kind of sowing the seeds for the weaker dollar that we kind of expect going into 2026,” Mr. McCormick said.