The loonie is higher amid Trump’s investigation of the Fed. Who will help – and hurt? – Nationally
The Canadian dollar rose on Monday as the US dollar fell after US Federal Reserve Chairman Jerome Powell said the Department of Justice (DOJ) had issued subpoenas to the central bank and threatened it with criminal charges.
Powell said in a video statement that the US DOJ’s allegations are related to testimony given in the summer of 2025 regarding the renovation of some Federal Reserve office buildings.
He added that he believes the allegations are an excuse for the Trump administration to take more control of the monetary policy and interest rates of the United States.
Powell’s warning sparked global shock among economists who fear the independence of the world’s most powerful bank is exposed.
“I didn’t always agree with Powell’s decision – including the consequences of the pandemic – but I would be more concerned about a situation where the administration of the day calls the shots on monetary policy,” said Derek Holt, vice-president and head of Capital Markets Economics at the Bank of Nova Scotia in a written note.
Why does this make the loonie fly?
On Jan. 9 at the end of the day, the Canadian dollar was worth about 71.90 USD cents, and as of publication just before 4pm Eastern on Jan. 12, it costs about 72.10.
The Canadian dollar, like many currencies around the world, is priced against the US dollar because the latter is considered the most widely used currency in the world.
The strong loonie against the US dollar means Canadian consumers could see some benefits – such as fuel prices, imports from the US, and possibly some food prices – but could also see challenges for exporters.
Commodities such as crude oil are bought almost everywhere in the world in US dollars.
“If the US dollar were to suddenly rise as a result of what happened with the Fed Reserve chair, that would reduce Canadian gas prices,” said Patrick De Haan, head of gas analysis at GasBuddy.
“Oil prices around the world are denominated in US dollars, so a weaker dollar can mean lower gas prices for Canadians and a stronger US dollar can mean higher prices.”
De Haan added that Canadians may begin to see somewhat cheaper fuel prices this week, but political risks could wipe out some of those discounts if they continue to be a problem in global oil markets.
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These risks include Venezuela after the US invasion and the capture of Nicolás Maduro, protests in Iran and the possibility of US intervention, and ongoing tensions between Russia and Ukraine.
A strong Canadian dollar may help local businesses that want to import products if they are priced in US dollars.
“There are some potential short-term benefits for Canadian buyers and Canadian sellers to the extent that the Canadian dollar buys more foreign goods, and remember that many contracts are made in US dollars – even if they are not for American sellers,” said Karl Littler, senior vice-president of public affairs at the Canadian Trade Council.
When it comes to exporting Canadian goods, Littler says a higher loonie against the U.S. dollar can be problematic because Canadian goods can cost more to some foreign customers.
“As an exporting nation, the effects of a struggling export industry on the broader economy and on jobs and economic growth and so on is that sellers may benefit, consumers may benefit from a stronger dollar, but if Canadian exporters get hammered, then there could be a broader recession that could end that,” he said.
“Maybe a silver lining in a cloudy economic environment.”
A strong loonie may mean that some consumer spending will decrease on food products imported from other nations like the United States, but it could hurt Canadian farmers.
“In the short term, it could mean that food prices go down because we buy more fruits and vegetables during the winter and we pay for that in US dollars as our dollar gets stronger,” said Mike von Massow, a food economist at the University of Guelph.
“On the other hand, however, we are an important exporter of food products and this will hurt farmers who sell their products in the foreign market because it will be more expensive for those who buy.”
What are the long-term risks?
Central banks like the US Federal Reserve and the Bank of Canada are expected to act independently, and make their decisions based on expert assessments and data rather than political policy or partisan interests.
That includes how he makes decisions about interest rates.
The US President has previously spoken of his displeasure with Powell for not cutting interest rates to boost the economy.
Most central banks such as the Fed and the Bank of Canada have the authority to keep the national economy stable by adjusting interest rates as needed to maintain price stability while encouraging economic growth.
Lowering interest rates risks prematurely raising inflation to levels that can make goods and services more expensive, while raising rates too quickly can make borrowing less expensive for businesses and consumers and trigger a recession.
This is why many economists believe that central banks like the Fed need to remain independent to serve the best interests of the economy, not political agendas.
“We need to hold that independence is very important because the expectation of inflation actually drives inflation in the future, it drives wages, it drives all kinds of things. That feedback loop between the interest rate and the expectation of inflation – which is important to have stable and predictable inflation,” said Andrew DiCapua, chief economist at the Canadian Chamber of Commerce.
DiCapua says that the direction of the Federal Reserve by Trump will mean more economic uncertainty.
“I still have little faith that other institutions will respond to this official. But as mentioned, this is the first time that the Fed independence risk premium will be faced this year.”
Karl Schamotta, chief market strategist at Corpay in Toronto pointed to the “unintended consequences” of leaning on the Fed in comments to Reuters.
“By trying to influence the central bank through aggressive legal threats against individual officials, the administration could drive up expected inflation, destroy the dollar’s safety net role, and cause a sharp rise in long-term bond yields that raises borrowing costs throughout the American economy.
“Pouring gasoline everywhere and playing with matches usually doesn’t work well,” he said.
How will that uncertainty affect you?
Along with the US dollar’s rise, news that the DOJ is looking ahead to the Federal Reserve shook stock markets like Wall Street early Monday, although there was a recovery during the day.
For those with retirement or investment portfolios, those ups and downs can be worrisome.
“The initial negative reaction didn’t surprise us. I think what surprised me was how quickly the markets came back,” said Craig Ellis, chief investment officer at Bellwether Investment Management..
“I think that in the last year at least, we have seen many, I will say surprising announcements that have not settled investors even those who have, the markets have recovered quickly – this investigation adds to that uncertainty.”
Ellis says Canadians managing investment portfolios, including retirees, should make sure they are diversified.
This means not having too much money tied up in one or a few investment products like a stock or bond or a gold bar for example, but instead spreading things around to better absorb any negative shocks.
“If the market senses that the Fed is becoming more independent and more politically influenced, you could see a rise in long-term bond yields, and that’s not what the US needs right now,” Ellis said.
“I think it’s one of the interesting things that President Trump feels he can influence short-term prices, but he has control over what happens at the long-term end of the yield curve.”
