The Canadian dollar has dipped to levels not seen since 2020, and this will likely significantly impact your everyday expenses.

This week, the loonie sunk below 72 cents U.S. for the first time in over four years, closing Tuesday at 71.89 cents U.S. after sinking just under 72 cents on Monday.

As of Friday morning, the Canadian dollar is at 71.86 cents U.S., according to foreign exchange tool XE.

So, why has it experienced such a big drop, and how will this affect the everyday Canadian? Here's what you should know.

Why has the Canadian dollar slumped?

There are several reasons why the loonie is trading lower than the U.S. dollar.

BMO Regional Vice President of B.C. North, East and Yukon Stephanie Partridge says the biggest driver is the diverging economic outlooks and interest rate decisions that have been made.

"Our Bank of Canada interest rate policy cut 50 basis points, which made a difference," she told us. "So, the outlook for the Canadian economy is looking weaker than the U.S." 

A higher central bank interest rate increases a currency’s value because it attracts overseas investment — meaning more money flowing into the country and a higher demand for the currency.

Chief currency analyst at ForexLive Adam Button told BNN Bloomberg that other factors driving the loonie are resource extraction, housing, and population growth.

"Canada isn’t doing very well on any of those fronts right now," he said.

Another driver that could greatly impact the Canadian dollar is the U.S. elections. Experts predict that Canada’s currency will fall below 70 cents if U.S. presidential candidate Donald Trump wins.

How will this impact your expenses?

Canadians are already struggling through a cost of living crisis, with many barely affording housing, let alone groceries.

Unfortunately, this currency slump will only add fuel to the fire.

"This dip will likely mean the cost of many everyday goods and products in Canada will be more expensive," explained Partridge. "Many retailers in Canada buy goods in U.S. dollars, which means they will pay more to get these products in their stores."

She gives the example of goods Canada imports from other countries, such as cellphone products and certain foods.

"Anything that we purchase from the U.S. and bring into Canada. So groceries, clothing, whatever it might be, is going to face an increased cost," said Partridge.

Travelling abroad will also be more expensive due to the lower Canadian dollar, she adds. Canadians who like to cross the border to the U.S. to take advantage of cheaper grocery prices might have to take a break. Snowbirds will also likely take a hit on their bank accounts.

Are there any positives to the weak Canadian dollar?

There is a silver lining to this slump.

Partridge says Canada will likely see an increase in tourism because of the lower loonie.

"We’re going to see people coming to Canada because the dollar is less expensive here, which will bring money to our economy and to our businesses overall," she explained.

Partridge says cities like Vancouver and Toronto could see a boom in the film and entertainment industry.

"There’s [a] trickle-down effect from that into individuals by increasing spending within our environment," said Partridge. "It would be less expensive for U.S. companies to come and obviously do film production or entertainment in Canada."

How Canadians can ride out this dip

With experts predicting a weak loonie for the next few months, Partridge suggests Canadians take a moment to evaluate their current financial situation and have a plan in place.

Prioritizing budgeting and sticking to it is also important, she adds.

"Leveraging tools to track money — what’s going in, what’s coming out, and making sure that you’re always paying yourself first, so putting small amounts of money aside, $50 to $100 a month, can go a very long way in an environment like this," explained Partridge.

The BMO VP also suggests taking advantage of loyalty programs like Air Miles, as the points can help Canadians save money on travel with the Canadian dollar down.