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A Sinking Dollar is Trudeau’s Latest Legacy
The Canadian dollar has been on a downward trend in recent years, and it’s not just about commodity prices. In this article, we’ll explore the factors contributing to the loonie’s weakness and how it may impact the economy.
History of the Loonie
The Canadian dollar has fluctuated throughout history, with notable instances during past federal elections. The most famous instance was the devaluation of the ‘Diefenbuck’ in 1962, where the loonie sank from parity to 92.5 U.S. cents. This led to the eventual loss of office for the Diefenbaker government in 1963.
Factors Contributing to the Loonie’s Weakness
Several factors contribute to the Canadian dollar’s weakness:
- Commodity prices: Resources account for over half our export earnings, and commodity price fluctuations have a significant impact on the loonie.
- Political risk: Political instability and uncertainty can also affect the value of the Canadian dollar.
- Interest rates: Higher interest rates in the U.S. make American bonds more attractive to investors, which can put pressure on our currency.
- Increased private and public indebtedness: As investors become more concerned about Canada’s ability to service its debt, this can also impact the value of the loonie.
Looking Ahead
Expect the Canadian dollar to weaken further in 2025 due to several factors:
- Oil prices: Falling Chinese demand and an oil supply glut will likely lead to softer oil prices.
- U.S. Federal Reserve interest rates: The Fed is not expected to cut interest rates as much as the Bank of Canada has felt necessary, given our weaker economy and lower inflation forecasts.
- Indebtedness: Our debt continues to grow, with the IMF expecting Canada’s balance of payments to weaken further beyond this year.
Trump Tariffs
The potential application of Trump tariffs will also have a significant impact on the Canadian dollar. If applied, expect the loonie to weaken even further this month, which will soften the tariffs’ impact on Canadian exporters but hurt importers.
Legacy
On top of all their other economic challenges, Canadians don’t want a declining currency too. A sinking dollar is yet another negative in Justin Trudeau’s legacy.