With the US dollar surging, the loonie may dip below 72 cents amid expected Bank of Canada rate cuts
The Canadian dollar faces increasing pressures as the US dollar strengthens and the Bank of Canada is poised to cut interest rates ahead of the Federal Reserve, according to a report from The Financial Post.
TD Economics notes, “The US dollar is flying high,” underscoring its resilience compared to other major currencies which have felt the impact of higher interest rates more acutely.
In the last four months, the US dollar has seen a significant surge as the Federal Reserve shows no immediate signs of reducing rates, unlike other central banks that are nearing their policy limits.
“With markets punting out Fed cuts but not doing the same for other countries, the US dollar’s strength has no challenger until a pivot occurs in economic dynamics between countries or a geopolitical shift takes hold,” TD Bank's chief economist Beata Caranci and senior economist James Orlando explained in their analysis.
This strength has impacted other major currencies, with the pound, euro, and Canadian dollar each dropping between four and five percent over the past nine months.
The Canadian dollar has fluctuated between 72 and 76 US cents since the summer of 2022, when the Federal Reserve matched the Bank of Canada's rate hikes. Caranci and Orlando noted that if not for Canada’s rapid population growth spurring demand, the Canadian economy might already be in recession.
Further indicators of economic stress include a notable increase in unemployment, with a 23 percent rise in the number of unemployed workers over the past year—a figure consistent with recession levels.
As economic and inflationary pressures persist, the Bank of Canada is expected to lower its rates this summer, potentially driving the Canadian dollar below 72 US cents.
“The Canadian dollar is caught in the crosshairs. The Bank of Canada does not manage monetary policy with an eye on the loonie, but spreading interest rates too wide to its US counterpart could cause a break below the resistance level of 72 US cents,” the economists stated.
While Bank of Canada Governor Tiff Macklem and his deputies are cautious about moving too quickly ahead of the Fed, other factors such as escalating geopolitical tensions could also undermine the Canadian dollar.
Previously, higher oil prices might have supported the loonie, but the economists believe a surge in risk-off sentiment could now outweigh any gains from oil, potentially pushing the currency to 70 cents or lower.
