The Canadian dollar is set to march higher against America’s currency in 2026, reaching 75 cents U.S. by year-end.

That’s the latest take from economists and foreign exchange (FX) strategists who see the expected rate paths of the Bank of Canada and the Federal Reserve as the clearest signals in the fog of a trade war.

The currency pair (CADUSD=X) saw a volatile start to 2026. In January, the loonie slumped against its U.S. counterpart as surprisingly robust U.S. economic data raised bets that the Fed could remain on hold for longer. Then, U.S. President Donald Trump rattled this trajectory with his threats against Greenland, and open challenges to the Fed’s independence.

“The currency moved to where we thought it would by mid-year a lot faster than we thought we’d get there,” TD Bank economist Andrew Hencic told Yahoo Finance Canada in a recent interview.

“We’re still of the view that our 74-to-75 cent target by year-end is reasonable.”

At its January meeting, the Bank of Canada held its overnight interest rate at 2.25 per cent, marking the second consecutive pause since December 2025. The central bank’s governing council referenced “an unpredictable environment with little historical precedent,” in its summary of deliberations released earlier this month, adding “it was difficult to predict the timing and direction of the next change in the policy rate.”

The Fed cut U.S. interest rates three times in 2025. Major American investment banks are divided on what comes next. JPMorgan analysts see rates on hold through 2026. Bank of America and Morgan Stanley see two cuts this year.

“The Bank of Canada is on hold. The Fed is expected to deliver more interest rate cuts,” Hencic said. “The narrowing of the differential between U.S. and Canadian interest rates, particularly at the shorter end of the curve, is going to help the Canadian dollar appreciate.”

His view is premised on “status-quo” trade ties enduring between Canada and the U.S., meaning current levies on items like steel and aluminum remain in place, while a huge swath of goods are exempted under the Canada-United States-Mexico Agreement free trade pact.

“Our forecast just assumes that kind of holds into the future,” Hencic said.

“Things will gradually improve towards the tail-end of the year as those interest-rate differentials start to tighten up a little bit, and the economy continues to gain a little steam after 2025.”

Earlier this week, BMO Economics called for 75 basis points of Fed rate cuts in 2025, and a “long pause” for Canada’s central bank.

“Look for the CAD to continue appreciating to C$1.33 (US$0.752), or around 3½% over the year, by the end of 2026, which is a bit better than the rest of the pack, as the Canadian economy rebounds after being hit disproportionately by U.S. trade policy,” deputy chief economist Michael Gregory wrote in a research report.

CIBC Capital Markets expects a similar trajectory for the loonie.

“Most of the move stronger in the loonie in recent weeks is a result of the broad USD falling out of favour with investors due to geopolitical conflicts and trade-deal concerns,” their FX strategists wrote.

“It’s likely that the loonie will face some headwinds in the near term, however, as focus turns back to the renegotiation of the CUSMA trade agreement,” they added.

“We expect that USD/CAD will remain roughly around current levels, even as other USD pairs sell off. But moving into the back half of the year, a combination of an improving global cyclical backdrop and rate convergence between the Fed and BoC will have USD/CAD continuing lower towards $1.34, which is closer to what we see as a long term sustainable level.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on X @jefflagerquist.