Canadian Dollar Slumps to 21-Year Low as Trump Imposes Tariffs

February 3, 2025 - Written by Frank Davies

STORY LINK Canadian Dollar Slumps to 21-Year Low as Trump Imposes Tariffs

The Canadian dollar crashed after President Trump carried out his threat to impose tariffs on Canada, dashing hopes of a last-minute reprieve.

The US Dollar-to-Canadian dollar (USD/CAD) exchange rate hit a 21-year high just below 1.4800 before a correction to 1.4680.

The Pound to Canadian dollar (GBP/CAD) exchange rate posted 2025 highs around 1.8180 before a retreat to 1.8070.

According to ING; “There are upside risks for USD/CAD in the near term, but markets will actively seek hints of de-escalation to buy the undervalued, oversold CAD.”

It added; “We think markets can add a greater risk premium on CAD as this is arguably the greatest idiosyncratic Canadian shock in recent decades. A move to 1.50 is a concrete possibility, especially when adding the solid probability of further USD appreciation on the back of the global tariff threat and inflationary risks for the US potentially delaying Federal Reserve easing even further.”

MUFG expects USD/CAD to trade above 1.50.

President Trump has imposed a 25% tariff on US imports from Canada, although there is a lower 10% tariff on oil imports.

These are due to come into force on February 4th.

Trump has imposed the tariffs by using emergency legislation which will open up the move to legal challenges.

In response, Canada has levied 25% tariffs on C$30bn-worth US goods from Tuesday with another C$125bn due in 21 days to give Canadian firms time to adjust.

This would include beverages such as beer, wine and bourbon, as well as agricultural products such as fruits and orange juices, together with clothing or household appliances.

Canada will also provide a mechanism for domestic businesses to obtain relief from retaliatory tariffs.

Trump has threatened more action if Canada retaliates.

According to Deutsche Bank; “Canada could retaliate with dollar-for-dollar tariffs in absolute terms since its trade relationship with the US is balanced, however, USDCAD will still be higher given that the US economy is more than 10x the size of its Canadian counterpart.”

Deutsche added; “In short, we think that the market continues to underprice the tail risks to USDCAD.”

Bank of America is less pessimistic; “the negative consequences for MXN and CNY could be initially contained for two reasons: First, much is already priced-in. Second, announced tariffs could be revoked if a solution can be found.”

If tariffs are sustained, the Bank of Canada response will be a key element.

According to ING; “With 75% of Canada’s exports going to the US – equating to 20% of Canada’s entire GDP – the risk of an outright recession is high. The BoC has already cut the overnight rate 200bp and our call for two additional 25bp rate cuts now is subject to significant risk.”

Aggressive rate cuts would tend to undermine the Canadian currency.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Canadian Dollar Forecasts