The Canadian dollar fell sharply against its US counterpart on Monday, August 24, after Canada-US trade negotiations collapsed and new tariffs increased concerns about the country’s growth outlook.
The loonie dropped as much as 0.6% to C$1.3844 per US dollar, leading losses among Group of 10 currencies. It was heading for its worst daily performance since June 17, reversing part of a rally that began in late June.
The decline matters beyond financial markets. A weaker Canadian dollar can make US travel, imported products and cross-border purchases more expensive, while tariffs create new risks for Canadian exporters, manufacturers and workers.
Why is the Canadian dollar falling?
Investors sold the loonie after weeks of negotiations between Ottawa and Washington ended without an agreement. The breakdown allowed 50% US tariffs on approximately US$20 billion of Canadian goods to take effect, covering about 5% of Canada’s exports to the United States.
The affected goods reportedly include wine, dairy products, furniture, cement, clothing, fishing equipment and hockey sticks. A full breakdown of the Canadian products affected by Trump’s 50% tariffs provides more detail for businesses and consumers.
These duties add to existing pressure on vehicles, auto parts, steel, aluminum and lumber. Prime Minister Mark Carney said Canada rejected unacceptable last-minute US demands and promised a “dollar-for-dollar” response.
US officials argued that Canada walked away despite being offered tariff reductions for several industries. The competing accounts have reduced expectations of a quick settlement.
When will Canada retaliate?
Canada’s counter-tariffs are expected to begin September 8 and cover US steel, electronics, dairy goods, appliances, agricultural equipment, pulp and paper.
Retaliation may protect some domestic producers, but companies relying on US materials or machinery could face higher costs. Importers may absorb those expenses, change suppliers or pass part of the increase to customers.
The confrontation also raises questions about continental trade rules. The potential consequences of a wider CUSMA breakdown for Canadian jobs and economic growth explain why businesses are closely monitoring the dispute.
Could USD/CAD reach C$1.40?
C$1.40 is an important market level, but reaching it is not guaranteed. From C$1.3844, the loonie would need to weaken by slightly more than another 1% for one US dollar to buy C$1.40.
MUFG forecasts USD/CAD could reach C$1.41 during the third quarter if the conflict remains unresolved. Its projection reflects risks to Canadian exports, investment and business confidence.
Brown Brothers Harriman believes reduced expectations for US interest-rate increases could limit sustained movement beyond C$1.40. Lower US rate expectations would normally reduce support for the American currency.
These are analyst forecasts, not fixed targets. Exchange rates can change quickly following new negotiations, tariff exemptions, economic data or central-bank signals.
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Why interest rates matter
Swap markets had priced approximately 70 basis points of Canadian interest-rate increases through June. Expectations of higher Canadian rates can support the loonie by making Canadian assets more attractive.
A prolonged trade war could weaken exports and investment, causing traders to reduce those expectations. Tariffs may simultaneously increase import costs and inflation, leaving the Bank of Canada balancing weaker growth against higher prices.
The Bank of Canada’s official exchange-rate data showed one US dollar was worth C$1.3760 on Friday, August 21. The subsequent move to C$1.3844 shows how quickly sentiment deteriorated after the negotiations failed.
What a weaker loonie means for Canadians
Canadians travelling to the United States will receive fewer US dollars, making hotels, meals, fuel and entertainment more expensive in Canadian-dollar terms.
Persistent weakness may also raise prices for imported electronics, clothing, food, machinery and online purchases. The effect will depend on retailer inventories, currency hedging and whether companies pass costs to customers.
Canadian exporters can sometimes benefit because a weaker currency makes their products cheaper abroad. However, a 50% tariff can eliminate much of that advantage in the US market.
What markets are watching
Hedge funds had reduced bearish bets against the loonie after those positions reached a two-year high in late July. The latest shock could encourage traders to rebuild negative positions, adding further selling pressure.
Investors will now watch for renewed negotiations, product exemptions, government assistance and the final scope of Canada’s September 8 tariffs. Oil prices and Canadian and US interest-rate expectations will also influence the currency.
For now, C$1.40 is a credible risk level rather than a confirmed outcome. A renewed agreement could support the loonie, while a prolonged conflict could push markets to downgrade Canada’s growth outlook.
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