Loonie falls further after U.S. Fed rate cut. Here’s what’s happening

globalnews.ca:

The Canadian dollar’s slide continued Wednesday amid expectations for a slower pace of rate cuts from the U.S. Federal Reserve.

The Federal Reserve cut its key interest rate Wednesday by a quarter-point — its third cut this year — but also signaled that it expects to reduce rates more slowly next year than it previously envisioned, largely because of still-elevated inflation.

The Fed’s 19 policymakers projected that they will cut their benchmark rate by a quarter-point just twice in 2025, down from their previous estimate in September of four rate cuts.

The Canadian dollar fell roughly half a cent compared to its U.S. counterpart after the Fed decision Wednesday. The loonie was trading around 69.3 cents US as of 4 p.m. Eastern, just a day after crossing the 70-cent threshold for the first time since March 2020.

A widening gap between the Bank of Canada and the U.S. Fed’s policy rates is typically bad news for the loonie, explains Rahim Madhavji, president of Knightsbridge Foreign Exchange, a currency exchange based in Toronto.

The Bank of Canada got a headstart on its interest rate easing cycle amid earlier success taming inflation and signs of weakness in the Canadian economy. It has cut 1.75 per centage points from its policy rate this year, compared to just 75 basis points of easing from the U.S. Fed.

While the Bank of Canada has signalled that its pace of cuts will also slow in 2025, the news that the Fed was slashing its own forecast for next year meant that gap will likely persist.

Madhavji told Global News on Wednesday that investors are more likely to park their money in an economy with higher interest rates in hopes of a better return.

“Interest rates attract investment,” he said. “And if we’re cutting rates