US dollar exchange rate

The USD–CAD exchange rate is expected to drop modestly in 2026, with a projected 0.7% drop, and this move should be gradual as both central banks maintain a cautious "wait-and-see" stance amid uneven labor markets and stubborn inflation pressures rather than rushing into aggressive easing. Markets currently anticipate another interest-rate cut from the FOMC by year-end, while the Bank of Canada appears less inclined to lower rates further in the near term, which would narrow interest-rate differentials and provide incremental support for the Canadian dollar versus the U.S. dollar. If Canada also moves ahead with major energy and industrial projects that expand domestic productive capacity and export potential, the Loonie could gain additional ground against the USD, reinforcing this gradual tightening of the exchange-rate gap and potentially leaving the currency pair on a slightly stronger footing for the country by the end of the year than in the prior periods.

Major volatility has characterized the 2021 to 2026 period, as the Canadian dollar was repeatedly influenced by external shocks and shifting economic fundamentals. Early in the period, the currency rebounded due to rising oil prices and signs of economic recovery following the onset of the COVID-19 pandemic. However, the US economy's faster recovery soon led to sustained loonie depreciation, particularly as investors directed funds toward the comparatively stronger US dollar. Short-term boosts from geopolitical events, such as the Russian invasion of Ukraine, drove temporary surges in demand for Canadian energy exports, but these effects proved transitory as global capital flows once again favored the US. Divergent monetary policy responses—while both the Bank of Canada and the US Federal Reserve raised rates to curb inflation—the US dollar remained a more attractive vehicle for global investment, reinforcing the loonie's relative weakness. Ongoing trade tensions and episodic disputes, especially surrounding North American tariffs and negotiations, have created persistent uncertainty, amplifying currency volatility and undermining investor sentiment.

Macro trends, such as shifts in commodity markets and changes in global capital flows, played a crucial role in shaping the driver over 2021 to 2026. The loonie's value tracked not only the fortunes of Canadian energy exports but also responded sharply to global risk aversion during periods of financial instability, including episodes of elevated inflation and supply chain disruption. Underlying these patterns was the persistent outperformance of the US economy compared to Canada's more moderate expansion, reinforcing the loonie's long-term depreciation trend despite intermittent episodes of strength. This pushed USD/CAD to a level of 1.2% CAGR from 2021 to 2026.