Loonie Weakens as Fed Rate Hike Widens Interest Differential

The Canadian dollar weakened to near 1.40 per USD in mid-September after the US Federal Reserve raised interest rates as expected.

The Fed hiked the target range for the federal funds rate by 25 bps to 3.75%-4%, giving the US dollar an advantage over the Canadian dollar, also known as the loonie.

According to updated Fed projections, most policymakers expect another interest rate hike before the end of 2026, which will widen the interest-rate differential between the US and Canada.

The Bank of Canada kept its key policy rate unchanged at 2.25% at its September meeting, as widely expected, but noted that inflation risks had increased and new tariffs made the growth outlook more uncertain.