Canadian Dollar Falls on US-Canada Trade War

The Canadian dollar fell to around 1.38 per US dollar from a three-month high of 1.376 on August 21st as the US-Canada trade war intensified following the collapse of negotiations. US President Donald Trump said that tariffs on all Canadian cars, trucks, automotive parts and steel would rise to 50% on January 1, 2027. This was after Prime Minister Mark Carney vowed to retaliate the initial series of tariffs by the US that were imposed after trade talks fell through. Washington imposed 50% tariffs on furniture, plastics, plywood and electrical equipment, adding to existing 25% tariffs on steel, lumber and autos. Risks to growth from higher tariffs reduced the argument for a rate hike by the Bank of Canada this year, even though elevated energy prices threatened a pickup in inflationary risks.

The Canadian dollar fell to around 1.38 per US dollar, retreating from a three-month high as the US-Canada trade war intensified following the collapse of negotiations. President Donald Trump’s 50% tariffs on a range of Canadian goods took effect on Saturday after weeks of talks broke down shortly before the deadline. The new levies are expected to affect around 5% of Canada’s annual exports to the US, worth roughly $20 billion, covering products such as hockey sticks, agricultural products, wine, cement, clothing, furniture, cameras, and other consumer goods. In response, Canadian Prime Minister Mark Carney said the country would impose retaliatory tariffs starting September 8. Geopolitical tensions also kept investors cautious, with the US expected to announce fresh sanctions on Iran later in the day. Meanwhile, markets are looking ahead to Federal Reserve Chair Kevin Warsh’s first Jackson Hole speech later this week for further clues about the outlook for US interest rates.

The Canadian dollar strengthened to 1.38 per USD in late August, nearing a three-month high, supported by a weaker US dollar and elevated crude oil prices. The loonie’s gains were primarily driven by renewed pressure on the greenback as investors reassessed the Federal Reserve’s policy path. Recent US economic data, including softer inflation readings, fueled expectations that the Fed could begin cutting interest rates sooner than previously anticipated, weighing on the dollar and supporting commodity-linked currencies. Meanwhile, crude oil prices remained elevated near multi-month highs, benefiting the Canadian currency as higher energy prices improve the country’s terms of trade. On the trade front, Canadian and US negotiators are set to meet in an effort to finalize a deal that could ease months of tariffs and counter-tariffs. Canadian bond yields rose across the curve, tracking higher US Treasury yields.