The Canadian dollar is facing a difficult combination of pressures just as Canada’s trade relationship with the United States enters another uncertain stretch. On September 22, the loonie touched its weakest level against the U.S. dollar since August 5, with widening interest-rate differentials and renewed trade concerns weighing on the currency.
The move is about more than tariffs. Higher U.S. interest rates, expectations that the Federal Reserve could remain relatively aggressive, and uncertainty about Canada’s economic outlook have all strengthened the greenback’s advantage. At the same time, elevated oil prices are complicating the Bank of Canada’s job by supporting export revenues while adding inflation pressure. For Canadian households and businesses, the currency’s decline is another reminder that a trade dispute can quickly spill beyond factories and border crossings into borrowing costs, import prices and everyday purchasing power.
The Loonie Slides Back Toward 71 U.S. Cents
The Canadian dollar weakened 0.3% on September 22 to around C$1.4075 per U.S. dollar, equivalent to roughly 71.05 U.S. cents. During the session, it reached C$1.4078, its weakest intraday level since August 5. Bank of Canada data also showed the daily average exchange rate moving from C$1.4021 per U.S. dollar on September 21 to C$1.4064 on September 22. Those figures are calculated differently from real-time market quotes, but both pointed in the same direction: the loonie was losing ground quickly.
The pressure continued into September 23. A Reuters market update reported the Canadian currency around C$1.4083 per U.S. dollar in morning trading, or about 71.01 U.S. cents, after reaching C$1.4094 during the session. The move is notable because the loonie had been worth about 72.55 U.S. cents on September 8 according to Bank of Canada data. Currency changes of a cent or two can appear small, but across billions of dollars of trade, corporate payments and investment flows, they can produce meaningful changes in costs and returns.
A Growing Interest-Rate Gap Is Giving the U.S. Dollar an Advantage
One of the clearest forces behind the loonie’s weakness is the widening difference between Canadian and U.S. bond yields. Reuters reported that Canada’s two-year government bond yield had fallen roughly 148 basis points below its U.S. equivalent on September 22. That was the largest gap since March 2025. Canadian two-year benchmark yields had been around 3.29% on September 21, according to Bank of Canada data, while U.S. rates were being supported by expectations for tighter Federal Reserve policy.
That gap matters because currencies compete partly through the returns investors can earn on assets denominated in them. When comparable U.S. securities offer substantially higher yields than Canadian ones, holding U.S. dollars can become more attractive, all else being equal. The effect is sometimes described as the dollar’s “carry advantage.” It does not determine exchange rates by itself—growth, commodities, risk sentiment and trade flows matter too—but it can become powerful when several forces point in the same direction. In this case, the widening yield spread arrived at the same time that investors were becoming more concerned about Canada-U.S. trade uncertainty.
The U.S. Tariff Dispute Is Adding Another Layer of Risk
The renewed tariff fight has become an important part of that uncertainty. Bank of Canada Governor Tiff Macklem said in a September 21 speech that Canada-U.S. trade tensions had re-escalated after a breakdown in negotiations and the imposition of new tariffs. He noted that Canadian auto, steel and aluminum businesses had already been among the sectors hit particularly hard by the trade conflict, while the latest escalation had extended the pressure to additional companies.
The Bank estimates that products directly affected by the latest U.S. tariffs represent about 5% of Canada’s goods exports to the United States. That may limit the direct economy-wide damage, but uncertainty can have broader consequences than the tariffs themselves. Companies unsure about future market access, pricing or supply chains can postpone hiring and investment. The Bank warned that, if the newest tariffs remain in place, Canadian economic growth in the fourth quarter could be roughly halved to below 1%. For currency traders, weaker expected growth can make Canadian assets less appealing and complicate the case for higher domestic interest rates.
The Bank of Canada Is Caught Between Slower Growth and Inflation Risk
Canada’s central bank is facing an unusually awkward combination of risks. On September 2, the Bank of Canada left its overnight rate at 2.25%, a level it has maintained throughout much of 2026. Trade disruptions can weaken demand, investment and employment, which would normally argue against raising borrowing costs. At the same time, high energy prices and some tariff-related costs are keeping inflation risks elevated.
Macklem described precisely that tension in his September 21 remarks. Trade uncertainty is expected to restrain demand, while higher oil and refined-fuel prices are putting upward pressure on inflation. The Bank has stressed that monetary policy cannot eliminate tariffs or control global energy prices; it can only try to prevent those shocks from destabilizing Canadian inflation. Reuters reported on September 22 that markets were assigning roughly a 60% probability to an October Bank of Canada rate increase. Even that expectation was not enough to support the loonie because U.S. yields remained substantially higher. The next Canadian decision, scheduled for October 28, will therefore be watched closely for any shift in how policymakers balance those competing pressures.
The Federal Reserve Has Made the Greenback Harder to Compete With
Conditions south of the border have strengthened the other side of the currency pair. On September 16, the U.S. Federal Reserve raised its federal funds target range by a quarter percentage point to 3.75%–4.00%. The Fed said economic activity remained solid while inflation was still elevated. That left U.S. policy rates significantly above the Bank of Canada’s 2.25% overnight target.
Investors have also been considering the possibility of additional Federal Reserve tightening. Reuters reported that the U.S. dollar was strengthening against a basket of major currencies on September 22 as markets assessed whether further rate increases might be necessary. That matters for Canada because the loonie can fall even without a dramatic deterioration in domestic conditions if the U.S. dollar is strengthening broadly. The dynamic has already appeared repeatedly during September. The Canadian dollar weakened for several consecutive sessions as the U.S.-Canada rate differential widened, including an eight-day losing run reported by Reuters on September 18. In other words, Canada’s trade problems are arriving at a particularly difficult moment: the currency on the other side of the exchange rate is itself being supported by tighter monetary policy.
High Oil Prices Are No Longer Providing a Simple Boost
Oil normally has an important relationship with the Canadian economy because energy is one of the country’s major exports. Higher crude prices can improve export revenues and Canada’s terms of trade, which can provide support for the currency. Yet that traditional relationship has not been strong enough to reverse the loonie’s current decline. Reuters reported U.S. crude futures up about 0.9% at US$96.65 per barrel during the September 22 currency session even as the Canadian dollar fell.
The reason is that expensive energy is creating problems alongside the potential benefits. Macklem said the Bank estimates that under normal conditions, a 10% increase in oil prices adds approximately 0.2 percentage points to Canadian CPI inflation. Recent refining disruptions have made the situation even more complicated because gasoline and diesel prices have risen more sharply than crude alone might suggest. Canadian inflation had been running around 3% in recent months, according to the Bank. That means stronger oil prices can simultaneously support export income and make monetary policy more difficult. For the loonie, the positive commodity effect is therefore competing with inflation risk, weaker growth expectations and a large U.S. interest-rate advantage.
A Weaker Dollar Can Reach Canadian Wallets in Subtle Ways
Exchange-rate moves eventually extend beyond financial markets. At an exchange rate around C$1.4075 per U.S. dollar, a US$100 purchase represents roughly C$141 before credit-card spreads, bank fees, taxes or other charges. That is immediately noticeable for Canadians paying U.S.-dollar hotel bills, buying goods from American websites or purchasing other services priced in greenbacks. Businesses face similar arithmetic when they import machinery, components, technology or raw materials invoiced in U.S. dollars.
The effect on Canadian consumer prices is more complicated than simply converting currencies. Bank of Canada research has repeatedly found that exchange-rate movements can pass through to import prices and eventually some retail prices, but the degree and timing vary substantially by product, industry and economic conditions. Companies may absorb part of a currency move in their profit margins, switch suppliers or delay price changes. A weaker loonie can also improve the competitiveness of Canadian-produced goods for foreign buyers. That means depreciation creates winners as well as losers, but for households already dealing with elevated fuel costs and inflation, more expensive imported products can add another layer to the affordability squeeze.
Trade Talks, Central Banks and Oil Will Determine What Comes Next
The next major moves in the Canadian dollar are likely to depend on the same forces that drove it toward its seven-week low: the Canada-U.S. trade relationship, relative interest rates and energy prices. The Federal Reserve is scheduled to meet October 27–28, while the Bank of Canada will announce its next policy decision and Monetary Policy Report on October 28. Any change in expectations about those meetings could quickly narrow or widen the yield gap that has been weighing on the loonie.
Trade developments may be even harder for markets to price because businesses are already adapting to an environment that has changed repeatedly. Macklem said Canadian non-energy exports rose 14.5% in the second quarter and reached their highest level since early 2025, while more than two-thirds of Canadian exporters surveyed by the Bank said they planned to expand into new markets over the next two years. Those shifts show that the economy is responding rather than standing still. For the currency, however, adaptation takes time. Until investors gain more clarity on tariffs, growth and monetary policy, the Canadian dollar is likely to remain highly sensitive to every change in the economic relationship across the border.
