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Fate of Canadian Dollar Played Role in Past Federal Elections, Could Do So Again
Canada’s dollar has played a role in past federal elections so it wouldn’t be big surprise if it did in 2025’s too. Most famous instance was devaluation of ‘Diefenbuck.’ With Canada economy weakening and Diefenbaker government fighting over monetary policy with Bank of Canada governor James Coyne, not only did our dollar sink – from parity to 92.5 US cents, where it was fixed in 1962 in agreement with IMF – but so did fortunes of Diefenbaker government, which eventually lost office in 1963.
After reaching US$1.04 in 1974, loonie slid to 69.1 cents in 1986, reflecting growing deficits, lower commodity prices and threat of Quebec separation. It hit its all-time low of 61.8 US cents in January 2002, result of weak commodity prices and global uncertainty following September 2001 attack on US.
After resource boom and continuing fiscal responsibility brought our dollar back up to parity during Harper years, it fell to below 80 US cents when commodity prices collapsed after October 2014. Since 2018, it has fluctuated around 75 cents but has trended down once again since early last year. After Chrystia Freeland resigned as finance minister it dipped below 70 cents, as political turmoil loomed.
Several factors cause Canada dollar to weaken. Commodity prices play big role: resources account for over half our export earnings. So does political risk. And if real interest rates stay higher in US, investors will prefer American to Canadian bonds. Increased private and public indebtedness to rest of world also puts pressure on our dollar as investors become more concerned about our ability to service that debt.
Expect Canada dollar to weaken further in 2025. Oil prices are likely to soften due to falling Chinese demand and oil supply glut. US Federal Reserve is not expected to cut interest rates as much as Bank of Canada has felt necessary, given our weaker economy and lower inflation forecasts. And our indebtedness continues to grow – with IMF expecting Canada’s balance of payments to weaken further even well beyond this year.
Then there are Trump tariffs. Should they actually be applied on Trump’s first day in office, as he has threatened, expect Canada dollar to weaken even further this month. That will soften the tariffs’ impact on Canadian exporters but will hurt Canadian importers. US tariffs will also encourage Canadian companies to shift production and capital to US rather than try to keep exporting from Canada, which is of course goal of Trump’s mercantilist policies.
If loonie falls further this year, that will be another negative in Justin Trudeau’s legacy. On top of all their other economic challenges, Canadians don’t want declining currency too.
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