It is easy to get lost in the noise of recent financial headlines. We are seeing gold and silver hit all-time highs before slipping back, a new Federal Reserve Chair nomination, and the U.S. dollar (USD) stumbling to a four-year low. Add in chatter about "de-dollarization” with momentum growing as Nordic pension funds trim U.S. asset exposure, and the signal gets messy.

If foreign exchange markets are all connected, a stumbling U.S. dollar should theoretically bode well for the Canadian dollar (CAD), right?

Well, not exactly, and that’s what we’ll unpack in today’s edition of The Twenty-Four.

Why the U.S. dollar is having a "bad" year

For decades, the world has been overexposed to the USD, and for good reason. The U.S. offered the deepest financial markets, rule of law, economic and political stability. There was simply no viable alternative, so global investors seemingly shrugged off structural risks like a growing deficit.

But things are changing. We aren't seeing a total abandonment of the USD, and it will likely remain the dominant reserve currency* for a long time, but we are seeing the world hedge its USD exposure.

Policy uncertainty, fiscal challenges, and questions surrounding Federal Reserve independence have become a catalyst for this shift. The "stability premium" the U.S. used to enjoy has eroded. Investors are no longer just buying the USD blindly; they are hedging their exposure, leading to the broader US Dollar Index (DXY)** slipping, and a rotation into precious metals like gold and silver at the margins.

The Canadian reality: Stagnation disguised as stability

So, does a weaker USD mean the Canadian dollar is in a good place?

The short answer is no.

The loonie is heavily influenced by a few factors, such as, interest rate differentials, the U.S. economy, and the DXY. As we’ve discussed at length, the Bank of Canada has reached the end of its rate cutting cycle, while the Federal Reserve remains on hold (for now), making the U.S. more attractive for investors and playing a modest role in CAD depreciation. Moreover, as our largest trading partner, we are exposed to weakness in the U.S. economy. And, when the DXY falls, the CAD typically rises since the two share an inverse relationship. But what we are seeing now isn't a story of Canadian dollar strength; it’s a story of American dollar weakness.

The loonie looks like it’s holding up, but that is largely an optical illusion caused by USD depreciation. The CAD was one of the weakest performing major currencies against the USD in 2025. Largely because, under the hood, the drivers of genuine currency appreciation—economic growth and geopolitical stability (this year’s CUSMA review is a key source of uncertainty)—are missing here at home.

Growth, productivity, and the way forward

Canada’s productivity has been a longstanding challenge. GDP growth, despite performing better than expected when the trade war started, has failed to gain much traction and finished the year soft. Capital flows to growth, and right now, Canada isn't offering enough of it.

There is a silver lining: a relatively weaker currency acts as a discount for our exporters, making Canadian goods cheaper and more attractive on the global stage(imports, however, get more expensive). In any case, we cannot build a future solely on a weaker currency to restore competitiveness.

At ATB Economics, we risk sounding like a broken record, but the antidote remains the same: productivity and investment. To see genuine currency strength rather than just "less weakness" vis-à-vis the USD, we need to focus on what drives value: attracting long-term capital investment, expediting major nation-building projects, and fixing the productivity gap.

The bottom line

Our latest forecast for the Canada-U.S. exchange rate assumes some upside in 2026 and 2027.

While the Canadian dollar will always be influenced by the movements of the U.S. dollar, its long-term strength is determined by factors within our control. It is valuable to watch the global trends, but we shouldn't let the noise distract us from the work needed at home.

*Central banks hold reserves - a mix of foreign currencies, government bonds (primarily U.S Treasuries and dollars), and sometimes gold, as insurance to stabilize their currencies and economies. 

**The U.S. Dollar Index (DXY) measures the value of the U.S. dollar against a basket of six major foreign currencies: Euro, Japanese yen, British pound, Canadian dollar, Swedish krona, Swiss franc.

Answer to the previous trivia question: Luge, skeleton, and bobsleigh are the three “sliding” sports at the Winter Olympics. Luge is the fastest with top speeds of over 140 km/h.

Today’s trivia question: Who is the captain of the Canadian women's hockey team at the 2026 Olympics?