Canadian Dollar Plummets Amid New U.S. Tariffs and Global Trade Tensions

Canadian dollar declines amid new US tariffs
Photo by Michelle Spollen on Unsplash

The Canadian dollar has experienced a significant decline following the United States’ recent imposition of sweeping tariffs on imports from Canada, Mexico, and China. On February 2, 2025, President Donald Trump announced 25% tariffs on imports from Canada and Mexico, and 10% tariffs on Chinese imports, effective February 4. These measures have ignited fears of a global trade war, leading to substantial market volatility.

Canada and Mexico, the U.S.’s top two trading partners, swiftly pledged retaliatory actions in response to the recent U.S. tariffs, while China announced plans to challenge Trump’s levies at the World Trade Organization. Canada has already outlined plans to target $155 billion worth of U.S. goods, though Mexico has yet to specify its countermeasures. “The surprise for markets … is that Canada and Mexico retaliated immediately and that others, i.e. China and the EU, may follow their lead, resulting in a sharp contraction in global trade,” Tony Sycamore, a market analyst at IG, told Reuters.

These developments have contributed to the Canadian dollar’s depreciation, which has reached a 20-year low, as noted by The Guardian.

The Bank of Canada has responded to these economic challenges by reducing its key policy interest rate by 25 basis points to 3%. According to Bloomberg, Governor Tiff Macklem emphasized that while the exchange rate has not constrained monetary policy decisions, significant movements in the currency will be considered in future policy settings. He also noted that although they are far from needing quantitative easing, they are prepared to support growth if necessary. Inflation is expected to rise initially due to tariffs, but the bank aims to prevent this from becoming persistent.

Financial markets have reacted strongly to these developments. U.S. stock futures saw sharp declines, with notable drops in Nasdaq and S&P 500 futures. The U.S. dollar surged against several currencies, including the Canadian dollar, Mexican peso, and Chinese yuan. Analysts predict potential negative impacts on corporate earnings, inflation, and central bank policies, with possible selloffs in stocks and higher-risk assets. The long-term effects remain uncertain, with potential temporary or extended tariffs stirring ongoing market instability.

Economists warn that the tariffs could accelerate inflation in the U.S. and reduce real GDP growth. A strong U.S. dollar negatively affects emerging markets, and the tariffs are seen as an extreme form of protectionism that could lead to a protracted trade war, especially with potential retaliatory actions from China.

The Canadian dollar’s decline has significant implications for various sectors. A weaker loonie can benefit Canadian exporters by making their goods more competitive abroad but can hurt importers and make international travel more expensive for Canadians. Katherine Judge, director and senior economist with CIBC Capital Markets, told the Toronto City News that she expects the Canadian dollar to hover around current levels for the remainder of the year, with a potential rebound in 2025. She notes that the loonie’s slide is partly due to the U.S. dollar’s strength following Trump’s re-election and the proposed tariffs.

As the situation evolves, businesses and investors are closely monitoring trade negotiations and central bank responses to navigate the uncertainties in the global economic landscape.