The loonie is faltering. Here’s why the U.S. Fed might provide a lift

The U.S. Federal Reserve is set to make an interest rate decisions on Wednesday, with BMO's chief economist signalling there could be implications for the Canadian dollar.

Canadians may have noticed the value of their dollar dwindling ever since the Bank of Canada’s latest interest rate cut last week.

But it’s a decision from the U.S. Federal Reserve coming up this week that could have more of a say in whether the loonie holds pat for the rest of the summer.

Canada’s dollar is trading at a little over 72 cents compared with the U.S. greenback as of Tuesday. That’s roughly half a cent lower than it stood a week earlier, just ahead of the Bank of Canada’s meeting where it cut its benchmark interest rate by another quarter of a percentage point to 4.5 per cent.

Doug Porter, chief economist at BMO, said in a brief note to clients Tuesday morning that “the Canadian dollar is probing levels it hasn’t seen much in the past 20 years.”

He noted that the loonie’s value has dropped 1.5 per cent since the Bank of Canada’s rate cuts began in early June. The only recent cases where it has fallen lower were when oil prices took a steep hit in 2016 and the early days of the COVID-19 pandemic in 2020.

Porter noted that while the loonie has struggled against the U.S. dollar for a while now, recent weakness has seen the Canadian dollar also lag the euro, yen and pound.

The Bank of Canada’s easing policy rate, as well as a marked change in tone that suggests monetary policymakers are eyeing more cuts in the months ahead, is likely a big reason for the dollar’s weakness.

“No doubt, the (Bank of Canada’s) very dovish stance is beginning to chip away at the currency,” Porter said, referring to the hints of further rate cuts to come.