CAD/USD Exchange Rate

Canada vs US dollar: how the loonie went to 1.46, what got it back to 1.37, and why the rate gap explains almost none of it

The Canadian dollar opened 2025 at about 1.43 CAD/USD, hit roughly 1.46 at the close on February 3 (an intraday low near 1.4792, the lowest level since 2003), and clawed back to 1.37 by mid-February 2026. The story in between is the most consequential year for the loonie since 2014–15. The single most important fact is that the Canada–US interest rate differential explains only a tiny fraction of the move. The Bank of Canada's own staff put it bluntly: of the 2025 depreciation, "about 1 percentage point of the widening rate differential contributed to roughly 1% depreciation." The rest was the FX risk premium — read: tariff fear. This page is about the year the loonie became a tariff barometer.

For the indicator definition (Bank of Canada daily reference rate, USD per CAD inverted to CAD per USD) see the CAD/USD indicator page. This page is about what just happened.

The numbers

From the Bank of Canada daily reference series:

• 2015-01-02: about 1.17 CAD/USD.
• 2017-01-03: about 1.34.
• 2018-01-08: about 1.24.
• 2020-01-16: about 1.30.
• 2021-06-01: about 1.20 — post-COVID loonie peak.
• 2023-02-01: about 1.33.
• 2025-02-03: about 1.46 — the 9-year low and the trough of the tariff shock.
• 2026-02-18 (latest): about 1.37.
• 9-year average: about 1.32.

The structural picture is a CAD that has averaged near 1.32 for almost a decade, oscillating in a fairly narrow band, with two big shocks: COVID 2020 (trough then bounce) and the 2025 tariff shock, which is the largest sustained move in the series since the 2014–15 oil crash. The recovery to 1.37 is two-thirds of the way back to the long-run average — but no major bank desk expects a return to the pre-tariff 1.30 area in 2026.

The 2025 tariff shock — a six-week timeline that broke the loonie

On February 1, 2025, Donald Trump signed three executive orders under the International Emergency Economic Powers Act imposing 25% tariffs on most Canadian goods, 10% on Canadian energy, 25% on Mexico, and 10% on China, effective 12:01 a.m. ET on February 4. It was the first-ever use of IEEPA to impose tariffs in the statute's history. Trudeau, then still Prime Minister, announced retaliatory 25% tariffs on CA$30 billion of US goods immediately and another CA$125 billion in three weeks. By the close on February 3 the loonie had hit 1.46, with intraday dealing reaching the 1.4742 to 1.4793 zone — the lowest CAD/USD since 2003.

What followed was political chaos and policy ping-pong. Trump announced a 30-day pause on the Canadian tariffs on February 3. Mark Carney won the Liberal leadership on March 9 with more than 85% of first-preference votes; Justin Trudeau formally resigned on March 14 and Carney was sworn in as Prime Minister, the first PM to take office without a seat in the House of Commons in modern history. The 30-day pause expired on March 4 and tariffs resumed; the loonie weakened again. On April 2 — "Liberation Day" — Trump's reciprocal-tariff executive order added a 10% global baseline plus country-specific reciprocal rates, but Canada and Mexico were exempted from the new reciprocal regime because the February IEEPA orders already covered them, and USMCA-compliant goods remained exempt. Canada's federal election on April 28 returned the Liberals with a 169-seat minority — three short of majority — and Pierre Poilievre and Jagmeet Singh both lost their seats.

The recovery in the loonie from 1.46 to 1.37 over the rest of 2025 and into early 2026 traces three things: the carve-outs for USMCA-compliant goods (most Canada–US trade qualifies), broader USD softness through H2 2025, and rising market confidence that the IEEPA tariffs were legally doomed. That last channel was vindicated on February 20, 2026, when the Supreme Court struck down the IEEPA tariffs 6 to 3 in Learning Resources, Inc. v. Trump (Roberts opinion; Sotomayor, Kagan, Gorsuch, Barrett, and Jackson joining; Thomas, Kavanaugh, and Alito dissenting). Penn-Wharton estimates the IEEPA tariffs collected about $175–179 billion before being struck down. Trump immediately re-imposed a 10% global tariff under Section 122 of the Trade Act of 1974, effective February 24, 2026 — but Section 122 caps the rate at 15% and the duration at 150 days.

The interest rate differential is the smaller piece

Both central banks cut in 2025. The Bank of Canada cut from 3.25% at the start of 2025 to 2.25% by October — six 25-basis-point moves — and held at that level at the December 10 decision, the January 28, 2026 MPR, and the March 18, 2026 decision. The Federal Reserve cut from 4.25–4.50% to 3.50–3.75% over the course of 2025 and held at the January 28, 2026 FOMC. Fed funds midpoint of 3.625% versus BoC 2.25% leaves the differential at about 137.5 basis points in favour of the US dollar, down from a peak around 150 to 175 basis points in mid-2025.

The killer fact is the Bank of Canada's own staff finding. Staff Analytical Note 2025-2 (Fontaine, Krohn, Kyeong, Vala and Zmitrowicz, February 2025) concludes that the widening Canada–US rate differential of about 1 percentage point contributed only about 1% of CAD depreciation. Most of the move is the FX risk premium — i.e., investors demanding more compensation to hold CAD because of tariff uncertainty. That is the official answer to the question "is the Bank of Canada killing the loonie by cutting too fast?" The answer is: no, the carry trade is too small to explain the move; the tariff risk premium is doing the heavy lifting. Cross-link to the prime rate compare page for the policy rate divergence in retail terms.

The petro-loonie has faded

Historically, the CAD/WTI correlation was strikingly high — 0.88 pre-2018, around 0.75 from 2018 onward. In 2024–2025 it has, in the words of multiple bank desks, "essentially disappeared." BMO chief economist Doug Porter put the old rule of thumb as roughly "a $10 increase in WTI used to push the loonie about 3 cents higher; the relationship has broken down." The mechanics: US shale turned the United States into a net energy exporter, so both currencies now respond similarly to oil; Canadian heavy crude gets a Western Canada Select discount; and the Trans Mountain Expansion, in service mid-2024, lifted Canadian crude exports to record highs in 2024–2025 without restoring the FX channel. In 2025, WTI fell roughly 12% on the year and the CAD trade-weighted basket actually rose about 1.8% — a clean illustration that the petro-loonie story is over for now. Goldman Sachs argues the correlation reasserts in supply-shock episodes (e.g., Iran-related spikes mid-2025) but not in normal demand-driven oil moves. See the oil price compare page for the WTI side of this story.

The REER says CAD weakness is overstated

The Bank for International Settlements' Real Effective Exchange Rate for Canada was about 87.7 in September 2025 (2005 = 100), down from 88.3 the previous month. The IMF's External Sector Report 2025 finds Canada's REER fell 4.2% in 2024 versus 2023, and was about 4.3% below the 2024 average through March 2025. The takeaway is that the loonie's slide is mostly nominal, not just bilateral against the USD — most major currencies also weakened against the king dollar in 2024 and early 2025. The bilateral USD/CAD chart overstates the loonie story because it embeds the broader USD strength that hit every G10 currency. On a trade-weighted basis the loonie is roughly 4 to 5% softer than its 2023 average — meaningful, but far less dramatic than the move from 1.30 to 1.46 implies.

Capital flows did not run

For all the rhetoric about a sudden stop in capital flows during the tariff war, the data say the opposite. Statistics Canada's full-year 2025 international transactions in securities show foreign acquisitions of Canadian securities totalling CA$116.4 billion for the year. Canadian acquisitions of foreign securities reached CA$133.8 billion — the highest since 2021 — led by US corporate equities (CA$84.2B) and US corporate bonds (CA$23.9B). Net portfolio outflow from Canada was CA$17.4 billion for 2025, with December alone accounting for CA$18.6 billion of that. In October 2025, even at the height of trade tension, non-residents acquired CA$38.6 billion of Canadian bonds, led by private corporate bonds and federal government bonds.

The Treasury TIC data tell the same story from the US side: Canada was the most aggressive 2025 buyer of US Treasuries, with holdings up 22% to about $430 billion in the first five months of the year. The CAD weakness was driven by flow composition and risk premium, not by capital flight. Foreigners kept buying Canadian bonds; Canadians kept buying US equities; net portfolio flows were modestly negative for Canada but nothing like a sudden stop.

Pass-through to inflation has been modest

The Bank of Canada's foundational work on exchange-rate pass-through (Discussion Paper 2015-9) puts the long-run pass-through to total CPI at about 6% — a 10% CAD depreciation lifts total CPI inflation by roughly 0.6 percentage points over time. Applied to the 2025 episode, the bilateral CAD/USD move was about 8% peak-to-trough, but on a trade-weighted basis the move was smaller. The implied addition to CPI from the FX channel alone is roughly 0.2 to 0.5 percentage points. That is small relative to the direct tariff pass-through, which the Bank has flagged as the bigger driver of the 2025 inflation surprise. See the CPI compare page for the inflation context.

Forecaster consensus

Three Reuters polls in late 2025 and early 2026 land in a tight cluster:

• Dec 3, 2025 poll (33 strategists): 3-month forecast 1.39; 12-month 1.36.
• Jan 5–7, 2026 poll (38 strategists): 3-month 1.38; 12-month 1.35.
• Jan 30 – Feb 4, 2026 poll (35 strategists): 3-month 1.38; 12-month 1.35.

Bank desk targets for end-2026 cluster around 1.30 to 1.33: RBC at 1.31, Scotiabank at 1.33 (revised down from 1.28 in September 2025 update), TD/CIBC/BMO clustering 1.30–1.33. The Bank of Canada's own technical assumption in the January 2026 MPR is a flat 72 cents US (≈ 1.389) over the projection horizon. No major desk is calling for a return to the pre-tariff 1.30 area, and none is calling for a re-test of 1.46. The consensus is a slow grind back toward 1.33–1.36 by year-end. The IMF's implied PPP rate from the October 2025 WEO is about 1.19, leaving the loonie roughly 13% undervalued at spot — but PPP gaps of 10–20% routinely persist for years (the Big Mac index has flagged CAD as undervalued continuously since around 2016).

What to watch in 2026

1. April 2026 BoC MPR — first full quarterly assessment under the post-SCOTUS Section 122 tariff regime. Watch the CAD technical assumption and the inflation projection.
2. June 2026 FOMC dot plot — first full revision under the Section 122 regime; watch for whether the Fed pencils in further cuts.
3. July 1, 2026: USMCA Joint Review begins — sunset clause. USTR public hearing was held December 3–5, 2025. If any party fails to confirm extension, the agreement enters annual reviews until 2036 termination. This is the structural risk premium driver for the loonie through the rest of the year.
4. Section 122 expiry — Trump's replacement 10% global tariff is capped at 150 days under that statute (so around mid-July 2026). What replaces it (Section 232, Section 301, congressional tariff legislation) determines whether the trade-war risk premium gets re-priced higher or lower.
5. IEEPA refund litigation — the Supreme Court did not rule on whether the ~$175–179B in collected IEEPA tariff revenue must be refunded. The court fights to come will affect both the US fiscal trajectory and the political appetite for further unilateral tariff action.
6. BoC and Fed rate decisions — the differential is at 137.5 bp in favour of the USD. Most desks expect it to narrow as the Fed catches up with cuts; that should provide a slow tailwind to CAD.

The stakes

The CAD/USD rate matters because Canadian and American consumer prices are linked through it (around a third of the Canadian CPI basket has meaningful import content), because cross-border investment decisions hinge on it, and because in a country with roughly 33% trade-to-GDP and 75% of exports going to the United States, the dollar is the cleanest single price of the Canada–US relationship. The 2025 episode is the cleanest natural experiment in years: the Bank of Canada cut rates aggressively, the Fed cut more slowly, the differential widened against CAD, and yet the rate channel explains barely a percentage point of the depreciation. The other 5–7 percentage points of the move were the price of trade-policy uncertainty.

The short version: the loonie touched 1.46 in early February 2025 because Donald Trump signed three executive orders the day before, not because of monetary policy. It clawed back to 1.37 because USMCA carve-outs took effect, the broader USD softened, and markets correctly anticipated that the Supreme Court would kill the IEEPA tariffs — which it did, on February 20, 2026, two days after the latest Bank of Canada reading on this page. What replaces those tariffs, and whether the USMCA Joint Review on July 1 produces a confirmation or a slow-motion termination, is the dominant question for CAD in 2026. The interest rate channel will help. The trade policy channel matters more.