The Canadian dollar is facing an unusual test. Oil prices have surged back above US$100 a barrel, a development that would normally offer meaningful support to the currency of one of the world’s largest petroleum exporters. Instead, the loonie weakened to 72.44 U.S. cents on September 9 as investors focused on an escalating Canada–U.S. trade confrontation.
The move was modest in percentage terms but revealing in what drove it. Fresh American import restrictions arrived just as Canadian retaliatory tariffs took effect, increasing uncertainty around a commercial relationship that still dominates Canadian exports. With higher oil prices simultaneously raising inflation risks and bond yields, currency traders are being forced to weigh Canada’s commodity advantage against a much larger concern: what happens when access to its most important market becomes less predictable?
Trade Risk Finally Beats the Oil Tailwind
The Canadian dollar fell about 0.2% to C$1.3805 per U.S. dollar on September 9, equivalent to 72.44 U.S. cents. During the session, it traded between C$1.3767 and C$1.3820. That was not a dramatic currency collapse; the loonie had traded below 72 cents earlier in September. What made the move notable was the reason investors were selling. Only a day earlier, the currency had risen to about 72.52 U.S. cents as traders concentrated on stronger crude prices despite growing political friction with Washington.
That balance shifted quickly. RBC Capital Markets strategist George Davis told Reuters that the latest American retaliation had dampened short-term sentiment toward the Canadian dollar even with crude strengthening. In practical terms, traders were assigning more weight to uncertainty about Canadian exports and investment than to the immediate income boost from oil. Currency markets often react less to a single tariff rate than to what a new measure says about the direction of the dispute. The September 9 move suggested investors saw the risk of further escalation as increasingly difficult to ignore.
Why US$100 Oil Wasn’t Enough
The oil backdrop would ordinarily look favourable for Canada. Brent crude climbed above US$100 for the first time in roughly six weeks and was trading near US$101.34 early September 10, while West Texas Intermediate stood around US$96.55. Fighting involving Iran and the United States has disrupted shipping around the Strait of Hormuz, a route that handled roughly one-fifth of global oil and gas supplies before the conflict. Scarcer Middle Eastern supply has therefore created a significant geopolitical premium in energy prices.
Canada has plenty at stake in that rally. The Canada Energy Regulator says the country exported 4.3 million barrels of crude oil per day in 2025, with 90.1% going to the United States. Those crude exports were worth C$140 billion, including C$126.1 billion sold into the U.S. market. Higher prices can lift petroleum revenues, investment and Canadian national income. Yet those figures also expose the contradiction confronting the loonie: the same United States that buys the overwhelming majority of Canadian crude is now at the centre of the country’s biggest trade risk. This time, the trade relationship outweighed the commodity windfall.
Retaliation Changes the Currency Equation
Canada’s latest countermeasures took effect September 8 after Ottawa responded to new U.S. tariffs. The federal government says the measures cover C$27.6 billion of American imports and apply rates of 15%, 25% and 50% to products including steel, dairy, appliances, agricultural equipment, pulp and paper, plastics and electronics. Existing counter-tariffs on some products remain in place as well. Washington answered with measures of its own, including bans on certain Canadian alcoholic beverages, dairy products and motorcycles that are scheduled to take effect September 29.
The currency market is looking beyond the immediate value of those products. Canada’s economic exposure to the United States remains enormous. Statistics Canada reported that exports to the U.S. dropped 6.6% in July, the sharpest percentage decline since April 2025. Canada’s merchandise surplus with the United States consequently narrowed from C$10.3 billion in June to C$5.9 billion. Exports to other countries reached a record C$25.6 billion, showing that diversification is occurring, but non-U.S. markets still accounted for only 33.7% of exports that month. Replacing American demand is therefore possible only gradually, not overnight.
Inflation Turns Currency Weakness Into a Policy Problem
The Bank of Canada entered this latest currency decline with an uncomfortable combination of risks already on its desk. On September 2, it kept the overnight policy rate at 2.25%. The Bank said headline inflation had been hovering around 3%, largely because persistently high gasoline prices were pushing up the consumer price index. Excluding gasoline, inflation was 2.2% in July, while the Bank’s preferred core measures remained close to 2%. That distinction matters because policymakers have been trying to determine whether the energy shock is temporary or becoming embedded elsewhere.
A softer Canadian dollar complicates that judgment. Imported goods become more expensive in Canadian-dollar terms when the currency depreciates, while retaliatory tariffs can raise costs independently. The Bank has explicitly warned that new U.S. tariffs and Canadian countermeasures could eventually feed into consumer prices. Oil above US$100 adds another layer through gasoline, freight, fertilizer and production costs. The result is an awkward policy mix: trade restrictions can weaken economic activity while simultaneously increasing prices. That makes simply cutting interest rates to cushion growth much harder than it would be during a conventional slowdown.
Bond Yields Are Sending Their Own Warning
Foreign-exchange traders are also watching a sharp repricing in bond markets. Canada’s 10-year government bond yield rose 3.8 basis points on September 9 to 3.849%, its highest level since May 2024. Canadian yields were following a broader increase in U.S. Treasury yields as investors worried that expensive energy could keep inflation elevated and force central banks to maintain tighter monetary policy. The move matters well beyond professional bond desks because government yields influence financing conditions throughout the economy, including corporate borrowing and, indirectly, fixed mortgage rates.
Interest-rate expectations are also becoming more supportive of the Canadian dollar on paper. Reuters reported that markets had fully priced in a Bank of Canada rate increase by December after Governor Tiff Macklem signalled that policymakers were prepared to tighten if inflation remained persistently too high. Yet that has not been enough to erase the trade discount. Currency values reflect more than interest-rate differentials. If investors conclude that tariffs could weaken Canadian investment, exports or hiring for an extended period, higher domestic yields may coexist with a softer loonie. The September trading pattern illustrates that tension clearly.
What a 72-Cent Dollar Means at the Household Level
For households, a move from roughly 73 U.S. cents toward 72 cents may sound insignificant until it is multiplied across everyday purchases. A weaker currency increases the Canadian-dollar cost of goods and services priced internationally, particularly those denominated in U.S. dollars. The Bank of Canada has previously estimated that U.S.-sourced final consumer goods and production inputs represent roughly 13% of Canada’s CPI basket. That does not mean a 1% currency decline automatically raises consumer prices by 1%; retailers can absorb some costs, hedge currencies or adjust margins before changing shelf prices.
Still, the direction of pressure is clear. Imported electronics, machinery, clothing, food ingredients and travel expenses can become more expensive when the loonie weakens. The effect can also arrive indirectly. A Canadian manufacturer importing U.S.-priced components may face a higher exchange-rate cost even when its finished product is assembled domestically. Add tariffs to that calculation and businesses can encounter two separate cost increases at once. Bank of Canada research shows that exchange-rate pass-through is usually incomplete and gradual, but persistent depreciation can eventually become visible in retail prices, especially when companies have less room to absorb higher costs.
A Weaker Currency Is Not a Free Export Boost
There is another side to a falling loonie. Canadian-produced goods become cheaper in foreign-currency terms, which can make exporters more competitive. Bank of Canada officials noted in July that recent currency depreciation would support export competitiveness while making imports costlier. That benefit can matter for manufacturers, tourism businesses and companies selling services abroad. Statistics Canada’s July figures also offered evidence that businesses are finding alternatives to the American market: non-U.S. merchandise exports climbed 7.4% to a record C$25.6 billion.
But the familiar argument that a weak Canadian dollar automatically creates an export boom is too simple. Bank of Canada research examining Canadian trade has found that the direct relationship between exchange-rate depreciation and exports is relatively weak. U.S. economic growth and the underlying reason for the currency movement can matter more. A manufacturer receiving more Canadian dollars for each U.S. sale gains little if tariffs eliminate the order altogether. The Bank has also warned that trade uncertainty can cause businesses to delay hiring and investment decisions. Currency competitiveness helps most when customers remain available and supply chains continue functioning.
What Could Move the Loonie Next
Several near-term events could determine whether 72.44 U.S. cents becomes another brief stop in the loonie’s recent trading range or the beginning of a more persistent slide. U.S. inflation data are central because the Federal Reserve meets September 15–16. A Reuters poll published September 9 found that most economists expected the Fed to hold its policy rate at 3.50%–3.75%, although expectations of another increase had been growing. A more hawkish Fed could strengthen the U.S. dollar broadly, creating an additional headwind for Canada even without another trade announcement.
The trade calendar may matter even more. The new U.S. import bans are scheduled for September 29, leaving several weeks for diplomacy, retaliation or further escalation. The Bank of Canada’s next scheduled rate decision comes October 28. Oil remains the wild card: continued disruption through the Strait of Hormuz could support Canadian energy income while simultaneously keeping inflation and bond yields high. The loonie is therefore being pulled by forces that normally point in different directions. For now, the market’s message is that US$100 oil is valuable—but predictable access to Canada’s largest customer is worth considerably more.
