The Canadian dollar is ending September under renewed pressure, with the loonie hovering near 70.6 cents U.S. after a sharp widening in the gap between Canadian and American interest rates. The latest completed trading week brought a third consecutive weekly decline and pushed the currency back toward levels last seen in July.
Behind the move is a difficult combination for Canada. The U.S. Federal Reserve has raised borrowing costs while the Bank of Canada remains on hold, making U.S. assets comparatively more attractive. At the same time, trade uncertainty, uneven Canadian economic data and shifting oil prices are complicating the outlook. For households, businesses and investors, the currency move is more than a market statistic: it can affect travel costs, imported goods, corporate margins and eventually inflation itself.
The Loonie Ends the Week Near 70.6 Cents U.S.
The Canadian dollar finished the latest full trading week under sustained selling pressure. On September 25, the loonie traded around C$1.4152 per U.S. dollar, equivalent to roughly 70.66 U.S. cents, after reaching C$1.4154 during the session. That intraday level was its weakest since July 14. The currency was down approximately 1.2% for the week, marking a third consecutive weekly decline and its sharpest weekly setback since March. The Bank of Canada’s own indicative daily exchange rate for September 25 was similarly weak, at about 70.70 U.S. cents per Canadian dollar.
What makes the move notable is how quickly the tone changed. Earlier in September, the Bank of Canada’s indicative rate reached 72.55 U.S. cents. A movement of less than two cents may appear modest, but in the enormous foreign-exchange market it represents a meaningful repricing of Canada’s relative economic and interest-rate outlook. The latest decline has also come despite periods of relatively elevated energy prices, which historically have sometimes provided the loonie with support.
The Interest-Rate Gap Has Become Hard to Ignore
The clearest pressure point is the growing difference between interest rates on opposite sides of the border. The Bank of Canada has held its overnight policy rate at 2.25% throughout 2026. The Federal Reserve, meanwhile, raised its target range by a quarter percentage point on September 16 to 3.75%–4.00%. Depending on which end of the Fed’s range is used, U.S. policy rates now sit roughly 1.5 to 1.75 percentage points above Canada’s overnight rate.
Bond markets have amplified that difference. By September 25, the yield on Canada’s two-year government bond was roughly 153 basis points below the comparable U.S. Treasury yield, the widest gap since February 2025. That matters because international investors constantly compare the returns available on short-term government securities and other assets. When U.S. yields rise relative to Canadian yields, holding U.S.-dollar assets can become more appealing. Currency markets are influenced by many forces, but such a large yield disadvantage gives investors another reason to favour the greenback over the loonie.
A Stronger U.S. Dollar Is Doing Part of the Damage
Canada is not facing the currency pressure in isolation. The U.S. dollar has strengthened against a broad range of major currencies as investors have adjusted to the Federal Reserve’s renewed tightening cycle. By late September, the dollar index had climbed more than 1% over the week and touched its highest level in roughly two months. The euro and British pound were also under pressure, highlighting that at least part of the loonie’s decline reflects a stronger greenback rather than uniquely Canadian weakness.
Rising U.S. Treasury yields have reinforced that trend. Investors increased expectations for additional Federal Reserve tightening after September’s rate increase, while resilient U.S. economic activity added to the argument for keeping borrowing costs elevated. Reuters reported that foreign-exchange strategists viewed broad U.S.-dollar strength and widening yields as major explanations for the Canadian dollar’s latest slide. This distinction matters. If the weakness were entirely rooted in Canada, domestic policy changes might have a larger effect. When the U.S. dollar itself is gaining globally, the Bank of Canada has considerably less influence over the exchange rate.
Canada’s Growth Picture Has Turned Uneven
The Canadian economy is not simply contracting across the board. Real gross domestic product rose 0.8% in the second quarter of 2026, equivalent to an annualized increase of about 3.3%. Exports climbed 3.6%, their fastest quarterly increase in more than three years, while exports of passenger cars and light trucks jumped 27%. Household spending and business investment also contributed to the rebound. Those numbers show that parts of the economy entered the summer with significantly more momentum than earlier in the year.
More recent indicators, however, have been less consistent. Retail sales fell 0.7% in July, with eight of nine subsectors declining, although Statistics Canada’s preliminary indicator points to a 1.3% rebound in August. An advance estimate also suggested real GDP was essentially unchanged in July. The bigger uncertainty comes from renewed U.S. trade measures. Bank of Canada Governor Tiff Macklem has warned that, if the latest tariffs remain in place, fourth-quarter growth could be roughly halved from earlier expectations and slip below 1%. That possibility gives currency markets another reason to demand a discount on Canadian assets.
Inflation Limits the Bank of Canada’s Room to React
Normally, a weaker economic outlook might strengthen the case for lower interest rates. Canada’s current inflation picture makes that decision far more complicated. Consumer prices were 3.0% higher in August than a year earlier, matching July’s increase. Transportation prices were up 7.5%, while inflation excluding gasoline was more subdued at 2.4%. That split illustrates the challenge facing policymakers: energy costs have pushed the headline number upward even though broader inflation pressures are considerably less severe.
The Bank of Canada has said that under normal circumstances a 10% increase in oil prices adds roughly 0.2 percentage points to consumer-price inflation. Recent disruptions have been more complicated because damage to refining capacity and transportation networks has driven gasoline and diesel costs beyond what crude prices alone would imply. At the same time, weaker growth caused by trade uncertainty would normally reduce inflationary pressure. The Bank therefore faces forces pulling in opposite directions. Cutting rates could widen the Canada–U.S. interest-rate gap even further, while raising them aggressively could add pressure to households and businesses just as trade uncertainty threatens growth.
Oil Is No Longer an Automatic Safety Net for the Currency
Canada’s role as a major energy exporter has historically created an important relationship between oil and the Canadian dollar. Higher energy prices can increase export revenues and improve Canada’s terms of trade, providing support for national income and, under some circumstances, the currency. Statistics Canada reported that higher export prices helped lift Canada’s GDP deflator by 2.5% in the second quarter, its strongest increase in four years, while energy products contributed substantially to export growth.
That relationship has become less straightforward during the latest currency decline. U.S. crude futures fell roughly 2.6% to around US$92 a barrel on September 25 as markets considered the possibility of reduced Middle East tensions. Falling oil removed one potential source of support for the loonie. Yet very high oil is not an uncomplicated positive either. Elevated energy prices can increase Canadian inflation and operating costs while also strengthening expectations for higher U.S. interest rates. Earlier in September, the Canadian dollar even weakened during periods when crude moved above US$100. Interest-rate expectations, trade risk and broad demand for U.S. dollars are currently capable of overwhelming oil’s traditional influence.
A Weaker Dollar Can Quietly Raise Canadian Prices
Currency depreciation eventually reaches beyond financial markets because Canada imports large quantities of goods, components and equipment. When the Canadian dollar weakens, a product priced in U.S. dollars becomes more expensive in Canadian-dollar terms unless the foreign supplier or domestic retailer absorbs the difference. Bank of Canada research has repeatedly found evidence of exchange-rate “pass-through” into import and retail prices, although the size and timing vary significantly depending on the product, invoicing currency, competitive conditions and the type of economic shock.
The effect is generally neither immediate nor one-for-one. Companies may initially accept lower margins, use currency hedges, renegotiate supply contracts or delay price adjustments. Recent Canadian experience with tariffs illustrates how gradually cost shocks can appear at stores. Bank of Canada researchers studying the 25% Canadian counter-tariffs imposed in 2025 found that prices of affected products rose gradually, peaking at about 6% after three months. Currency depreciation is a different shock, but the broader lesson is similar: higher import costs can work their way through supply chains over time rather than appearing on every price tag overnight.
Travel and U.S.-Dollar Purchases Become More Expensive Quickly
For Canadians buying directly in U.S. dollars, there is much less delay. At an exchange rate near 70.7 U.S. cents, C$1,000 converts to only about US$707 before any financial-institution spreads or transaction charges. On September 8, when the Bank of Canada’s indicative rate stood at 72.55 cents, that same C$1,000 was worth about US$725.50. In less than three weeks, the difference amounted to roughly US$18.50 for every C$1,000 exchanged.
The effect becomes equally visible when costs start in American dollars. A US$500 hotel bill, for example, translates to approximately C$707 at a 70.7-cent exchange rate, compared with about C$689 when the loonie was at 72.55 cents. That is an increase of roughly C$18 before card or currency-conversion costs are considered. The same arithmetic applies to U.S. online shopping, event tickets, vacation rentals and business expenses. A one- or two-cent currency move can therefore feel much larger to families or companies making repeated U.S.-dollar payments, particularly when thousands of dollars are involved.
Exporters Gain Some Help, but Tariffs Blunt the Advantage
A weaker Canadian dollar is not bad news for every part of the economy. Companies producing goods in Canada but selling them abroad can become more price-competitive when their costs are largely in Canadian dollars and their revenues are earned in U.S. dollars. The exchange rate can also increase the Canadian-dollar value of U.S.-dollar sales. That matters because the American market remains exceptionally important: Statistics Canada reported that 71.7% of Canadian merchandise exports went to the United States in 2025, even after that share declined substantially from 2024.
Recent export growth demonstrates the opportunity. Canadian exports of goods and services increased 3.6% in the second quarter of 2026, while merchandise data showed strong gains in energy and motor vehicles during the period. But exchange-rate advantages cannot erase tariffs or supply-chain costs. A Canadian manufacturer may receive more Canadian dollars for every U.S. dollar of sales while simultaneously paying more for imported machinery, parts or materials. Tariffs can also overwhelm a modest currency advantage. That makes the current depreciation far more beneficial to some exporters than others.
October 28 Could Become the Next Major Test
The next major monetary-policy checkpoint will arrive at the end of October. The Bank of Canada is scheduled to announce its next interest-rate decision and publish a new Monetary Policy Report on October 28. The Federal Reserve’s next two-day meeting runs October 27–28. That unusually close timing means currency traders will receive fresh signals from both central banks within a very narrow window, potentially reshaping expectations for the interest-rate gap before November begins.
Neither institution sets policy specifically to achieve a particular Canada–U.S. exchange rate. The Bank of Canada focuses on keeping inflation close to its 2% target, while the Federal Reserve operates under its U.S. inflation and employment mandate. The loonie nevertheless reacts strongly to the difference between their expected policy paths. Canadian inflation, economic growth, U.S. data, energy prices and trade developments will therefore matter as much as the exchange rate itself. Near 70.6 cents U.S., the Canadian dollar is signalling that investors currently see a meaningful advantage in U.S. yields. Whether that gap continues to widen will be one of the most important currency questions heading into the final quarter of 2026.
