The Canadian dollar dipped below 70 cents U.S. on Tuesday for the first time since early 2020 as the fallout from Chrystia Freeland’s resignation as deputy prime minister and finance minister hit the currency.

“I think it’s largely political risk weighing on the loonie (today),” Nick Rees, a senior FX market analyst at MonFX Pte Ltd., a Singapore-based commercial foreign exchange specialist, said.

The loonie fell even more as the morning wore on and is now down 3.4 per cent since the United States election on Nov. 5 and 7.6 per cent year to date.

Economists have attributed the decline to the strength of the U.S. economy and its currency as well as the widening gap between the Bank of Canada and the U.S. Federal Reserve‘s lending rates, which stand at 3.25 per cent and 4.75 per cent (at the upper bound), respectively.

A higher interest rate makes that country’s currency, the U.S. dollar in this case, more attractive to investors, given it has a greater rate of return.

Rees said the Canadian dollar should find a bottom soon since the Bank of Canada said during its Dec. 11 rate announcement that it will likely slow the pace of any future interest rate cuts.

That “should support the loonie through to pre-inauguration day” in the U.S. on Jan. 20, he said, adding that Tuesday’s inflation data “validates” the Bank of Canada’s position.

The consumer price index in November slowed to 1.9 per cent, just under the central bank’s inflation target of two per cent. However, the report provided a bit of a mixed bag since “stickiness” persists in the central bank’s preferred measures of core inflation.

Post-inauguration, Rees thinks all bets are off for the Canadian currency and that markets are “underestimating” the risk that Donald Trump‘s threatened tariffs of 25 per cent on imports from Canada and Mexico into the U.S. pose for the economy and the currency.

“Looking ahead to 2025, whether or not Trump follows through on this promise is likely to be the key to (the Canadian dollar’s) fortunes longer term,” he said in a note earlier this month. “If Trump follows through on his statements, then in our view USD/CAD could be trading at $1.50 by the end of next year,” which means the loonie would be worth 66 cents U.S.

• Email: gmvsuhanic@postmedia.com

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters financialpost.com.