The Canadian dollar is expected to see a modest recovery in 2025, but the looming threat of U.S. trade tariffs and uncertainty surrounding the Canadian election may limit its gains.
The Canadian dollar is set to recoup only a small part of its recent losses in the coming year as expected U.S. trade tariffs cloud the economic outlook, offsetting investor optimism around a likely change in government, a Reuters poll found. The median forecast of 37 foreign exchange analysts in the Jan. 3-8 poll predicted the loonie would edge 0.5% higher to 1.43 per U.S. dollar, or 69.93 U.S. cents, in three months, compared to the 1.4034 level expected in a poll last month.
The currency fell 7.9% in 2024, its biggest yearly decline since 2015, as Canadian bond yields fell below their U.S. counterparts by the most in over two decades. U.S. President-elect Donald Trump has suggested he might use “economic force” to make Canada the 51st U.S. state, which follows a threat to impose a 25% tariff on imports from the nation. Canada sends about 75% of its exports to the United States, including oil and cars. “We are assuming that Trump hits Canada with tariffs this year which is likely to weigh on the loonie,” said Stephen Brown, deputy chief North America economist at Capital Economics. “If anything, I’m concerned that the risks to our forecast still lie to the downside.” The Bank of Canada has cut its benchmark interest rate by 1.75 percentage points since June to support the Canadian economy, lowering borrowing costs to 3.25%, and has said the possibility of tariffs represented a major new uncertainty. Canadian Prime Minister Justin Trudeau announced on Monday he would step down in the coming months, bowing to pressure from lawmakers alarmed by his Liberal Party’s unpopularity. The next election must be held by Oct. 20 and polls predict a crushing win for the official opposition Conservatives, which analysts see as a positive outcome for the loonie. The Canadian dollar could strengthen in the second half of 2025 as lower borrowing costs begin to support the domestic economy, greater clarity around tariffs emerges, and as investors welcome an expected change in government, said George Davis, chief technical strategist at RBC Capital Markets. Policy initiatives point to “potential tax cuts, a more business-friendly environment and a more tolerant view of fossil fuels,” Davis said.
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