The Impact of a Weaker Loonie on Canadians

The Canadian dollar, or the loonie, has been losing value against the U.S. dollar in recent months. The loonie was trading at 72.55 cents US on Wednesday, October 25th, 2023, after the Bank of Canada (BoC) kept its key interest rate at five per cent and lowered its growth forecast for 2023. 

Here are some of the effects of a weaker loonie on Canadians:

1. Travel and imports become more expensive: A weaker loonie means that Canadians have to pay more for goods and services that are priced in U.S. dollars, such as travelling abroad, online shopping, and some food items. This can increase the cost of living and reduce the purchasing power of Canadians.

2. Exports and tourism become more competitive: A weaker loonie can also benefit some sectors of the Canadian economy that rely on exports or foreign visitors, such as oil and gas, forestry, manufacturing, and tourism. A lower exchange rate makes Canadian products and destinations more attractive and affordable to foreign buyers and travellers, which can boost revenues and create jobs.

3. Inflation and interest rates may rise: A weaker loonie can also put upward pressure on inflation, as higher import prices can increase the cost of goods and services in Canada. The BoC monitors inflation closely and adjusts its interest rate policy accordingly. If inflation stays above its two per cent target for a prolonged period, the BoC may raise interest rates to cool down the economy and curb inflation. Higher interest rates can affect borrowing costs, savings rates, and asset prices .

A weaker loonie can have both positive and negative impacts on Canadians, depending on their income sources, spending habits, and financial goals. It is important to be aware of the exchange rate movements and plan accordingly.