Canadian dollar slips as trade tensions weigh on loonie

Investing.com -- The USD/CAD The Canadian dollar fell on Monday, with the loonie weakening about 0.6% against the U.S. dollar, as investors assessed escalating trade tensions after President Donald Trump threatened higher tariffs on Canadian automobiles, parts and steel.

The loonie was trading around 72.24 U.S. cents, down about 0.4% on the day, while the U.S. dollar was around C$1.385. The Canadian currency has pulled back sharply from last week’s levels after reaching a more than two-month high.

U.S. President Donald Trump on Monday threatened to raise tariffs on Canadian automobiles, car parts and steel to 50% from Jan. 1, 2027, escalating trade tensions between the two countries.

“Canada will be treated like a State no longer!” Trump said in a post on Truth Social, adding to pressure on Ottawa after bilateral trade negotiations broke down late last week.

The latest decline came as markets reacted to the collapse of U.S.-Canada trade negotiations and the introduction of new U.S. tariffs on Canadian goods. Canada has said it will respond with retaliatory measures, raising concerns about the potential economic impact of a prolonged trade dispute.

Analysts at City Index noted Monday that the daily RSI on USD/CAD had entered oversold territory for the first time since January before Monday’s bounce, and the recovery is partly a technical short squeeze rather than a clean fundamental re-rating of the pair.

Canadian exporters — from winemakers and dairy farmers to furniture manufacturers and hockey equipment suppliers — are now subject to the new levies. Companies with significant Canada-US cross-border supply chains, including those listed on the Toronto Stock Exchange and NYSE with exposure to Canadian exports, face a new layer of cost and demand risk as the trade relationship deteriorates.

Prime Minister Mark Carney framed the breakdown in stark terms, telling reporters that "You’re at war when you get attacked. We got attacked." Ottawa has pledged to match Washington’s measures dollar for dollar, with retaliatory levies targeting US steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics scheduled to take effect September 8.

Higher crude prices are offering some partial cushion. Canada’s status as a major oil exporter means elevated energy prices tend to support the loonie even when political headwinds are building. Gold is also firming, up 0.9% to $4,643 an ounce on Monday, per Forex.com, reflecting broader bond-market anxiety and residual US dollar softness.

That dollar softness has its own backstory. Karl Schamotta of Corpay Cross-Border Solutions told the Financial Post that the US Treasury’s bond buyback announcement last week had been the "overwhelmingly driving force" in Canadian dollar strength through mid-August. Canada’s economy had also been printing strong numbers, a 3.4% annualised Q2 GDP expansion and a 75,000-job gain in July, adding to the loonie’s earlier rally. Those gains are now being unwound as tariff risk dominates.

The broader US Dollar Index is trading up 0.2% at 98.981 Monday, while EUR/USD is down 0.1% at $1.1665 and USD/JPY is up 0.1% at 159.13, per Reuters. Incremental broad dollar strength adds to the loonie’s headwinds, though the Canada-specific tariff story is the primary driver of Monday’s move in USD/CAD.

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