U.S. Dollar Strengthens Against Canadian Dollar: A Tale of Macroeconomic Divergence and Central Bank Policy Asymmetry

The U.S. Dollar (USD) has exhibited a notable strengthening trend against the Canadian Dollar (CAD) since June 2025, with the USD/CAD exchange rate rising from a low of 1.3573 CAD per USD to approximately 1.3815 CAD per USD by September 2025, according to exchange-rate data from 2025. This shift reflects a growing macroeconomic divergence between the two economies and stark asymmetry in central bank policy responses.

Macroeconomic Divergence: GDP, Inflation, and Labor Markets

The U.S. economy has demonstrated resilience, with Q3 2025 GDP growth projected at 2.0% on an annualized basis, supported by a stable labor market and moderate inflation, as reported by CBS News. In contrast, Canada's GDP contracted by 1.5% in Q2 2025 following the implementation of U.S. tariffs, which disrupted trade flows and dampened business confidence, according to the Bank of Canada's analysis. While Canada's GDP rebounded slightly in Q3, its growth trajectory remains weaker than the U.S., exacerbated by structural challenges such as high household debt and a strained housing market, per the Bank of Canada.

Inflation trends further underscore this divergence. The U.S. has seen core inflation ease to 2.4% as of June 2025, with the Federal Reserve projecting a return to its 2% target by 2028, according to the FOMC projections. Meanwhile, Canada's headline inflation remains near its 2% target, but underlying inflation has risen to 2.5%, driven by non-energy goods and shelter costs, as noted by the Bank of Canada. The Bank of Canada has attributed this to lingering trade tensions and integrated supply chains, though it notes that the removal of retaliatory tariffs has alleviated some inflationary pressures.

Labor market data amplifies the contrast. The U.S. unemployment rate stood at 4.3% in August 2025, with job creation slowing but remaining near pre-pandemic levels, according to the FOMC projections. Canada, however, faces a more dire scenario, with unemployment rising to 7.1% in August 2025-the highest in four years-due to trade-related job losses and economic uncertainty, as described by the Bank of Canada.

Central Bank Policy Asymmetry: Interest Rates and Monetary Frameworks

The Federal Reserve and the BoC have responded to these divergent economic conditions with contrasting policy approaches. In September 2025, the Fed cut the federal funds rate by 25 basis points, reducing the target range to 4.00%–4.25%-its first rate cut since December 2024-reported by CBS News. This move was driven by concerns over a cooling labor market and inflation risks, with officials projecting two additional rate cuts in 2025, according to the same coverage.

Conversely, the BoC also reduced its policy rate by 25 basis points in Q3 2025, bringing it to 2.5%-its lowest since July 2022-per the Bank of Canada. However, Canada's rate cuts were motivated by a weaker economy, reduced inflationary pressures, and the removal of retaliatory tariffs, which have lessened the BoC's inflationary concerns. The resulting interest rate differential-4.25% for the U.S. versus 2.5% for Canada-has bolstered the USD's appeal, as higher yields attract capital inflows into U.S. assets, a dynamic highlighted in media coverage.

The Fed's September 2025 policy statement emphasized a balanced approach to managing inflation and employment, reaffirming its 2% inflation target while acknowledging the need for flexibility, as reported by CBS News. In contrast, the BoC's policy pivot reflects a more accommodative stance, prioritizing economic growth over inflation control in the face of trade-related headwinds, according to the Bank of Canada. This asymmetry in monetary frameworks has further widened the USD/CAD gap.

Implications for the USD/CAD Exchange Rate

The combination of stronger U.S. economic fundamentals and a more hawkish Fed compared to the dovish BoC has driven the USD's appreciation against the CAD. By September 2025, the USD/CAD rate had edged toward 1.3815, with forecasts suggesting a potential rise to 1.3855 in October 2025, based on exchange-rate history for 2025. Analysts attribute this trend to the USD's status as a "safe-haven" currency amid global trade tensions and Canada's vulnerability to U.S. policy shifts, as discussed in a recent USD/CAD forecast.

Looking ahead, the Fed's projected rate cuts and the BoC's accommodative stance may limit the USD's upside potential. However, persistent macroeconomic divergence-particularly in GDP growth and labor markets-suggests the USD will remain underpinned against the CAD in the near term, per CBS News analysis.

Conclusion

The USD's strengthening against the CAD post-June 2025 is a direct consequence of divergent economic trajectories and asymmetric central bank policies. While the U.S. benefits from resilient growth and a controlled inflation environment, Canada grapples with trade-related disruptions and structural weaknesses. Investors should closely monitor upcoming GDP data, inflation reports, and central bank communications to gauge the sustainability of this trend.