The Canadian dollar rose on Monday as 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 summer of 2025 about renovations to some of 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 interest rates in the United States.
That warning by Powell has triggered a global shockwave from economists fearing the independence of the world’s most powerful central bank is openly on the line.
“I haven’t always agreed with Powell’s judgement — including the aftermath of the pandemic — but I’d be vastly more concerned about a scenario in which the administration of the day is calling 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.
On Jan. 9 at the end of the day, the Canadian dollar was worth about USD 71.90 cents, and as of publication just before 4 p.m. Eastern on Jan. 12, it’s worth about 72.10.
The Canadian dollar, like most other currencies worldwide, is priced in relation to the U.S. dollar because the latter is considered the most widely-used currency in the world.
A stronger loonie compared to the U.S. dollar means Canadian consumers may see some benefits — such as on the price 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 everywhere in the world in U.S. dollars.
“If the U.S. dollar were to suddenly tank because of what is happening with the Fed Reserve chair, that could push Canadian gas prices slightly lower,” says Patrick De Haan, head of petroleum analysis 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 start to see somewhat cheaper gas prices this week, but geopolitical risks may offset some of those discounts if they continue to be a concern 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, as well as ongoing tensions between Russia and Ukraine.
A stronger Canadian dollar may also help local businesses that want to import products if they are priced in U.S. dollars.
“There are some potential short-term benefits for Canadian consumers and Canadian retailers to the extent of the Canadian dollar buys more foreign goods, and bear in mind that a lot of contracts are U.S. dollar-denominated — even when they’re not with U. S. vendors,” says Karl Littler, senior vice-president of public affairs at the Retail Council of Canada.
When it comes to exporting Canadian goods, Littler says a higher loonie compared to the U.S. dollar can actually 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 benefit, consumers may benefit from the stronger dollar, but if Canadian exporters are getting hammered, then there may be broader economic malaise that could offset that,” he says.
“It’s maybe a silver lining in what is a pretty cloudy economic environment.”
A stronger loonie may mean some costs for consumers will come down for food products that are shipped in from other nations like the United States, but it may also hurt Canadian farmers.
“In the short term, it might actually mean food prices go down because we’re importing 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 at the University of Guelph.
“On the flip side of that, though, we are a significant exporter of food products and this will hurt farmers who are selling their products into the export market because it’ll be more expensive for those importers to buy.”
Central banks 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 rather than political policy or partisan interests.
That includes how they make decisions about interest rates.
The U.S. President has been vocal in the past about his displeasure with Powell for not cutting interest rates more to boost the economy.
Most central banks like the Fed and the Bank of Canada have a mandate to keep their national economies stable by adjusting interest rates as needed to maintain price stability while encouraging economic growth.
Dropping interest rates prematurely risks raising inflation to levels that could make goods and services too expensive, while raising rates too quickly could make borrowing less affordable for businesses and consumers and cause a recession.
This is why many economists believe central banks like the Fed need to stay independent in order to do what is best for the economy, and not for political agendas.
“We need to hold that independence paramount because inflation expectations really do drive future inflation, they drive wages, they drive all sorts of things. That feedback loop between interest rates and inflation expectations — that matters in having stable and predictable inflation,” says Andrew DiCapua, principal economist at the Canadian Chamber of Commerce.
DiCapua says the targeting of the Federal Reserve by Trump will mean more economic uncertainty.
“I have still a little bit of faith that other institutions will hold this administration accountable. But that being said, this is the starting of the sort of Fed independence risk premium that we’re going to be facing this year.”
Karl Schamotta, chief market strategist at Corpay in Toronto pointed to “unintended consequences” of leaning on the Fed in comments to Reuters.
“By trying 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 sharp rise in long-term bond yields that raises borrowing costs across the American economy.
“Pouring gasoline everywhere and then playing with matches tends not to work out well,” he said.
Along with the U.S. dollar taking a hit, 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 can be worrisome.
“The initial negative reaction wasn’t surprising. I think the surprising thing for myself is how quickly markets kind of recovered,” says Craig Ellis, chief investment officer of Bellwether Investment Management.
“I think over the last year and a bit, we’ve seen numerous, I’ll say surprise announcements that by and large haven’t rattled investors and even the ones that have, markets have recovered relatively quickly — this investigation just sort of adds to that uncertainty.”
Ellis says that Canadians who hold investment portfolios, including for their retirements, should ensure they’re diversified.
This means not having too much money tied up in one or a few investment products like a stock or bond or bar of gold for instance, but instead to spread things out to better absorb any negative shocks.
“If the market senses that the Fed is becoming less independent and more influenced by politics, you could actually see longer-term bond yields rise, and that’s not what the U.S. needs right now,” Ellis said.
“I think it’s one of the interesting factors is President Trump feels that he can influence short-term interest rates, but he really has very little control over what happens at the longer end of the yield curve.”