The Canadian dollar has come under significant pressure in recent days, moving closer to the 70-cent U.S. mark as investors increasingly favor the U.S. dollar amid shifting expectations for American interest rates.

On Friday, the loonie traded near 70.56 U.S. cents, a sharp decline from its 2026 peak of 74.1 U.S. cents reached in late January. The currency is now trading at its weakest level in roughly a year.

Currency strategists say the latest decline has been driven largely by renewed strength in the U.S. dollar. According to Bank of Nova Scotia chief currency strategist Shaun Osborne, the loonie experienced one of its steepest weekly declines of the year, with the U.S. dollar posting its strongest gains against the Canadian currency since the spring.

Osborne noted that the current trend could push the Canadian dollar even lower in the near term, potentially toward the 68.9 U.S. cent range if the U.S. dollar rally continues.

Federal Reserve Expectations Fuel U.S. Dollar Demand

The primary catalyst behind the move has been a significant reassessment of U.S. monetary policy expectations following the Federal Reserve’s June meeting.

Financial markets have increasingly shifted from anticipating future rate cuts to pricing in the possibility of additional rate hikes by the Fed. As a result, demand for the U.S. dollar has strengthened considerably.

The U.S. Dollar Index, which tracks the greenback against several major global currencies, advanced approximately 1.3% between Wednesday and Friday. Investors are now expecting U.S. interest rates to rise from the current 3.5% level to 3.75% sooner than previously projected.

Before the Federal Reserve’s latest policy meeting, markets had generally expected any rate increase to occur no earlier than 2027. However, traders are now assigning a high probability to a quarter-point increase before the end of 2026, with September and October emerging as key meetings to watch.

Interest Rate Gap Weighs on the Loonie

The widening difference between Canadian and U.S. interest rates is creating additional challenges for the Canadian dollar.

The Bank of Canada maintained its benchmark interest rate at 2.25% during its June 10 policy announcement, marking the fifth consecutive meeting without a change. Many economists believe the central bank will keep rates unchanged for the remainder of the year.

With U.S. rates expected to remain higher than Canadian rates, investors can earn more attractive returns by holding U.S.-denominated assets. This dynamic has encouraged capital flows into the U.S. dollar while reducing demand for the loonie.

Analysts also point out that the U.S. dollar continues to benefit from its reputation as a safe-haven currency during periods of economic and market uncertainty.

According to Osborne, the Canadian dollar’s weakness throughout the latter part of the second quarter reflects a notable expansion in yield spreads between Canada and the United States. While the Bank of Canada’s policy stance has offered some support, it has been overshadowed by the more aggressive shift in expectations surrounding the Federal Reserve.

Additional Risks Support the U.S. Dollar

Beyond interest rate considerations, other market factors are also contributing to the loonie’s decline.

Sarah Ying, head of currency strategy at CIBC Capital Markets’ fixed income, commodity, and currency division, noted that broader market risks currently favor the U.S. dollar. In an environment where investors are seeking safety and higher returns, the greenback has attracted stronger demand than many other major currencies, including the Canadian dollar.

Unless expectations for U.S. monetary policy change or investor sentiment shifts, the Canadian currency could remain under pressure in the months ahead.