The Canadian dollar is once again testing uncomfortable territory. The loonie fell to 70.15 U.S. cents on October 7, extending a slide that has brought it close to its weakest level in roughly a year and a half. The immediate catalyst was not a sudden deterioration in Canada alone, but a broad move toward the U.S. dollar as investors turned more cautious and absorbed a more inflation-focused message from the Federal Reserve.
That matters because the Fed has already lifted its policy rate above Canada’s and signalled that another increase could still be appropriate before year-end. For Canadian households and businesses, a weaker currency can make U.S.-priced travel, machinery, imported goods and other purchases more expensive. For exporters, however, it can provide some relief by improving price competitiveness abroad.
The Loonie Is Back Near an 18-Month Low
The loonie traded around C$1.4255 per U.S. dollar on October 7, equivalent to 70.15 U.S. cents, after falling about 0.3% on the day. It moved between C$1.4207 and C$1.4280, showing how quickly sentiment was shifting. Just two days earlier, the currency had touched C$1.4293, its weakest intraday level in about 18 months. That put the Canadian dollar back near a threshold that tends to attract attention because every move toward 70 U.S. cents makes American purchases noticeably more expensive in Canadian-dollar terms.
The weakness was largely part of a broader risk-off move rather than a uniquely Canadian shock. The U.S. dollar gained against several major currencies as investors reacted to renewed financial-market unease, including pressure in European bond markets and a pullback in equities. In such periods, demand often shifts toward the greenback. For the loonie, already facing a sizable interest-rate disadvantage, that global move added another layer of pressure.
Fed Minutes Put Inflation Back at Centre Stage
The Federal Reserve minutes released October 7 showed why markets hesitate betting against the U.S. dollar. At the September 15–16 meeting, every participant supported a quarter-point increase in the federal funds target range to 3.75%–4.00%. Officials said inflation remained elevated, economic activity was expanding at a solid pace and the labour market was close to maximum employment. Almost all participants judged inflation risks were tilted to the upside.
The key signal was what could come next. Most participants said another increase in the target range would likely be appropriate before the end of 2026, while stressing future decisions would depend on incoming data. Officials also worried that higher energy costs, strong demand and rapid AI-related investment could keep inflation persistent or allow price pressures to spread. That combination of higher rates and continued inflation vigilance gives the U.S. dollar a policy backdrop compared with currencies tied to cautious central banks.
The U.S.–Canada Rate Gap Is Working Against the Loonie
The gap between U.S. and Canadian policy rates is a clear structural pressure on the loonie. The Bank of Canada has held its overnight target at 2.25% since late 2025, including at its September 2 decision. The Federal Reserve’s current 3.75%–4.00% range sits 1.50 to 1.75 percentage points above Canada’s policy rate. That difference can make U.S.-dollar assets more attractive to investors when markets are defensive.
The Bank of Canada has acknowledged the mechanism directly. In July, it noted that U.S. bond yields had risen while Canadian yields were little changed and said the differential had contributed to depreciation of the Canadian dollar. The effect is not mechanical—currencies also respond to growth, commodity prices, trade flows and risk appetite—but rate expectations remain especially powerful. If markets believe the Fed may tighten again while the Bank of Canada stays on hold, the relative-return argument continues to favour the greenback.
Canada’s Domestic Economy Is Sending Mixed Signals
Canada’s domestic data are not uniformly weak, but they are soft enough to limit support for the currency. Statistics Canada reported that real GDP was essentially unchanged in July, with services output flat and manufacturing down 0.9%. August employment fell by 42,000 while the unemployment rate remained at 6.4%. Those figures reinforce the Bank of Canada’s caution about tightening policy aggressively simply to defend the exchange rate.
At the same time, inflation has not disappeared. Canada’s consumer price index was up 3.0% year over year in August. Trade data improved: merchandise exports rose 2.5%, imports fell 2.0% and the trade surplus widened to C$4.2 billion. Exports to the United States jumped 8.1%, partly as firms moved shipments ahead of new tariffs. The result is a mixed picture—solid trade flows and elevated inflation, but subdued domestic growth and softer employment—which leaves the loonie without a clear bullish catalyst today.
Oil Is Still Important, but the Link Is Weaker Than It Once Was
Oil still matters for Canada, but the relationship between crude prices and the loonie is less dependable than it was decades ago. On October 7, U.S. crude futures were down about 1.4% at US$88.20 a barrel as the Canadian dollar weakened. Energy remains a major export category, and Statistics Canada reported that energy-product exports rose 4.7% in August, helped by stronger refined-petroleum shipments and higher crude-oil export values.
Yet the Bank of Canada has noted that the historical oil-currency link has weakened since roughly 2015. Higher oil prices no longer generate the same level of energy-sector capital investment, reducing the foreign money that must be converted into Canadian dollars. That means a strong oil market can support Canadian incomes and exports without automatically producing a stronger currency. In the current environment, global risk aversion, U.S. interest rates and trade uncertainty can overpower the positive effect of relatively firm commodity prices.
A Weaker Dollar Can Feed Back Into Canadian Prices
For Canadian consumers, the most visible consequence of a weaker loonie is that U.S.-dollar prices translate into more Canadian dollars. At 70.15 U.S. cents, US$1,000 costs roughly C$1,425 before card spreads, bank fees or other charges. That affects travel, online purchases and business inputs priced in U.S. dollars. More broadly, imported goods and components enter Canadian supply chains before reaching store shelves.
The Bank of Canada’s July outlook explicitly said depreciation of the Canadian dollar raises import prices. Its research also shows exchange-rate pass-through is usually incomplete and delayed because retailers and importers may absorb part of the increase through margins. A persistent decline can add to inflation over time. That is especially relevant with headline CPI at 3.0% in August and with the Bank monitoring cost pressures from energy and trade measures. A weaker currency therefore creates an inflation risk even when domestic demand is not especially strong today.
Exporters Get a Cushion, but Trade Friction Limits the Upside
The same exchange-rate move that hurts importers can offer Canadian exporters a partial cushion. The Bank of Canada said in July that recent depreciation was making Canadian exports more competitive, while increasing the cost of imports. Companies earning revenue in U.S. dollars can receive more Canadian dollars when those sales are converted, and foreign buyers may find Canadian-made goods cheaper if exporters adjust prices.
That matters because the United States remains Canada’s dominant merchandise market. In August, Canada shipped about C$54.3 billion of goods to the U.S. out of C$77.9 billion in total merchandise exports—roughly 70%. But the benefit of a cheaper loonie is not a cure for trade friction. New U.S. tariffs have disrupted normal shipping patterns, and many Canadian manufacturers rely on imported American machinery, components or other inputs. A weaker currency can improve competitiveness while simultaneously raising production costs, leaving the net effect different across industries.
The Bank of Canada Faces a Difficult Policy Trade-Off
The slide complicates the Bank of Canada’s job because the usual policy responses point in opposite directions. Raising rates can support a currency and reduce inflation pressure, but it can weaken borrowing, housing and investment. Holding rates lower can protect a fragile recovery, yet a widening gap with U.S. rates may keep the loonie under pressure and make imports more expensive.
That tension is visible in the Bank’s own language. At its September meeting, policymakers kept the overnight rate at 2.25% while acknowledging that inflation risks had increased and growth prospects were uncertain. The Bank said supply shocks can create a conflict between economic weakness and rising prices, and policy would remain guided by the inflation outlook rather than any single market variable. It is unlikely to target 70 U.S. cents. But if currency weakness feeds into consumer prices, it could become a more important part of the inflation calculation.
The Next Few Weeks Could Be Decisive
The next major test arrives almost immediately. Statistics Canada is scheduled to release the September Labour Force Survey on October 9. August employment fell by 42,000 and unemployment held at 6.4%, so another weak report could reinforce that the Bank of Canada has less room to match U.S. tightening. A stronger reading could instead reducing concerns about domestic fragility and supporting expectations for Canadian rates.
The larger policy events come later in the month. The Federal Reserve meets October 27–28, followed on October 28 by the Bank of Canada’s next rate decision and Monetary Policy Report. Those meetings will give markets updated guidance on how each central bank is balancing inflation against growth. Until then, the loonie is likely to remain sensitive to U.S. inflation data, Canadian employment, oil prices, trade developments and shifts in global risk appetite. Around 70 cents, modest changes in expectations can attract unusually outsized attention.
