The Canadian dollar rose on Monday because the U.S. dollar fell after U.S. Federal Reserve Chair Jerome Powell said the Department of Justice (DOJ) has served the central bank with subpoenas and threatened it with a criminal indictment.
Powell said in a video statement that the U.S. DOJ’s allegations related to testimony given in the summertime of 2025 about renovations to among the Federal Reserve’s office buildings.
He added that he believes the allegations were a pretext for the Trump administration to have more control over monetary policy and rates of interest in america.
That warning by Powell has triggered a worldwide shockwave from economists fearing the independence of the world’s strongest central bank is openly on the road.
“I haven’t at all times agreed with Powell’s judgement — including the aftermath of the pandemic — but I’d be vastly more concerned a few scenario during which the administration of the day is asking the shots on monetary policy,” said Derek Holt, vice-president and head of Capital Markets Economics at Bank of Nova Scotia in a written note.
Why is that this making the loonie soar?
On Jan. 9 at the tip of the day, the Canadian dollar was value about USD 71.90 cents, and as of publication just before 4 p.m. Eastern on Jan. 12, it’s value about 72.10.
The Canadian dollar, like most other currencies worldwide, is priced in relation to the U.S. dollar since the latter is taken into account probably the most widely-used currency on the earth.
A stronger loonie in comparison with the U.S. dollar means Canadian consumers may even see some advantages — resembling on the worth of gasoline, imports from the U.S., and potentially some food prices — but could also see challenges for exporters.
Commodities like crude oil are priced almost in every single place on the earth in U.S. dollars.
“If the U.S. dollar were to suddenly tank due to what is occurring with the Fed Reserve chair, that would push Canadian gas prices barely lower,” says Patrick De Haan, head of petroleum evaluation at GasBuddy.
“Oil prices globally are denominated in U.S. dollars, so a weakening dollar would mean lower gas prices for Canadians and a strengthening U.S. dollar would mean increased prices.”
De Haan adds that Canadians may begin to see somewhat cheaper gas prices this week, but geopolitical risks may offset a few of those discounts in the event that they proceed to be a priority for global oil markets.
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These risks include in Venezuela after the U.S. attacks and capture of Nicolás Maduro, protests in Iran and the potential for the U.S. to step in, in addition to ongoing tensions between Russia and Ukraine.
A stronger Canadian dollar might also help local businesses that wish to import products in the event that they are priced in U.S. dollars.
“There are some potential short-term advantages for Canadian consumers and Canadian retailers to the extent of the Canadian dollar buys more foreign goods, and keep in mind that quite a lot of contracts are U.S. dollar-denominated — even once they’re not with U. S. vendors,” says Karl Littler, senior vice-president of public affairs on the Retail Council of Canada.
In relation to exporting Canadian goods, Littler says the next loonie in comparison with the U.S. dollar can even have drawbacks because Canadian goods may cost more to some international customers.
“As an export nation, the implications of a struggling export industry for the broader economy and for jobs and economic growth and so forth are such that retailers may profit, consumers may profit from the stronger dollar, but when Canadian exporters are getting hammered, then there could also be broader economic malaise that would offset that,” he says.
“It’s perhaps a silver lining in what’s a fairly cloudy economic environment.”
A stronger loonie may mean some costs for consumers will come down for food products which are shipped in from other nations like america, nevertheless it might also hurt Canadian farmers.
“Within the short term, it would actually mean food prices go down because we’re importing quite a lot of fruit and vegetables over the course of the winter and paying for that in U.S. dollars as our dollar gets stronger,” says Mike von Massow, a food economist on the University of Guelph.
“On the flip side of that, though, we’re a big exporter of food products and this can hurt farmers who’re selling their products into the export market since it’ll be dearer for those importers to purchase.”
What are the long run risks?
Central banks just like the U.S. Federal Reserve and the Bank of Canada are expected to operate independently, and make their decisions based on expert assessments and data quite than political policy or partisan interests.
That features how they make decisions about rates of interest.
The U.S. President has been vocal up to now about his displeasure with Powell for not cutting rates of interest more to spice up the economy.
Most central banks just like the Fed and the Bank of Canada have a mandate to maintain their national economies stable by adjusting rates of interest as needed to take care of price stability while encourage economic growth.
Dropping rates of interest prematurely risks raising inflation to levels that would make goods and services too expensive, while raising rates too quickly could make borrowing less inexpensive for businesses and consumers and cause a recession.
That is why many economists consider central banks just like the Fed have to stay independent to be able to do what’s best for the economy, and never for political agendas.
“We want to carry that independence paramount because inflation expectations really do drive future inflation, they drive wages, they drive all types of things. That feedback loop between rates of interest and inflation expectations — that matters in having stable and predictable inflation,” says Andrew DiCapua, principal economist on the Canadian Chamber of Commerce.
DiCapua says the targeting of the Federal Reserve by Trump will mean more economic uncertainty.
“I even have still a bit bit of religion that other institutions will hold this administration accountable. But that being said, that is the starting of the kind of Fed independence risk premium that we’re going to be facing this 12 months.”
Karl Schamotta, chief market strategist at Corpay in Toronto pointed to “unintended consequences” of leaning on the Fed in comments to Reuters.
“By attempting to influence the central bank through aggressive legal threats against individual officials, the administration could drive inflation expectations higher, erode the dollar’s safe-haven role, and trigger a pointy rise in long-term bond yields that raises borrowing costs across the American economy.
“Pouring gasoline in every single place after which fiddling with matches tends to not work out well,” he said.
How will that uncertainty impact you?
Together with the U.S. dollar taking a success, the news of the DOJ honing its sights on the Federal Reserve rattled stock markets like Wall Street early on Monday, although there was a recovery by midday.
For those with retirement or investment portfolios, those ups and downs may be worrisome.
“The initial negative response wasn’t surprising. I feel the surprising thing for myself is how quickly markets form of recovered,” says Craig Ellis, chief investment officer of Bellwether Investment Management.
“I feel over the past 12 months and a bit, we’ve seen quite a few, I’ll say surprise announcements that by and enormous haven’t rattled investors and even those which have, markets have recovered relatively quickly — this investigation just kind of adds to that uncertainty.”
Ellis says that Canadians who hold investment portfolios, including for his or her retirements, should ensure they’re diversified.
This implies not having an excessive amount of money tied up in a single or a number of investment products like a stock or bond or bar of gold as an example, but as an alternative to spread things out to raised absorb any negative shocks.
“If the market senses that the Fed is becoming less independent and more influenced by politics, you might actually see longer-term bond yields rise, and that’s not what the U.S. needs straight away,” Ellis said.
“I feel it’s one in every of the interesting aspects is President Trump feels that he can influence short-term rates of interest, but he really has little or no control over what happens on the longer end of the yield curve.”