USD/CAD price surges to 22-year high as Trump’s tariffs fuel risk aversion
Canadian dollar plunges as USD strengthens amid trade tensions
The USD/CAD pair surged to its highest level since April 2003, reaching mid-1.4700s, as U.S. President Donald Trump’s trade tariffs on Canada, Mexico, and China rattled markets. The safe-haven U.S. dollar (USD) strengthened sharply, while the Canadian dollar (CAD) faced additional headwinds from the Bank of Canada’s (BoC) rate cut and a weaker commodity outlook.
With the USD/CAD rallying past 1.4700, traders are eyeing further upside potential. If tariff tensions escalate and risk sentiment remains fragile, the pair could continue its bullish trajectory toward 1.48-1.50. However, a BoC policy response or a rebound in oil prices could slow the USD’s advance.
USD/CAD price analysis (January 2025 - February 2025) Source: TradingView.
Trump’s trade tariffs send markets into turmoil
Over the weekend, Trump announced 25% tariffs on Canadian and Mexican imports, along with a 10% tariff on Chinese goods, set to take effect on Tuesday. The tariffs are aimed at addressing illegal immigration and drug trafficking, though their broader economic impact has raised concerns. In response, Canada, Mexico, and China have vowed retaliatory measures, amplifying fears of a prolonged trade conflict.
The US dollar index (DXY) jumped to near a two-year high, benefiting from safe-haven demand. With investors fleeing riskier assets, the USD gained traction, putting further downward pressure on CAD. Additionally, the Canadian dollar’s close correlation with crude oil prices has exacerbated its decline, as energy exports from Canada will face a reduced 10% tariff under Trump’s directive.
BoC’s dovish stance widens divergence with the Fed
The Bank of Canada’s monetary easing cycle has further fueled CAD’s weakness. The BoC cut rates for the sixth consecutive time since June, lowering the benchmark rate to 3.0%, while also ending its quantitative tightening program. Meanwhile, the US Federal Reserve (Fed) maintained a hawkish pause, reinforcing a divergence in policy outlooks that favors further USD strength.
Canada’s GDP growth for December is estimated at 0.2%, with annual growth projected at 1.4% for 2024—in line with BoC expectations. However, the tariffs pose a significant risk to Canadian exports, potentially dampening future growth and exacerbating CAD’s decline.
In our previous analysis, we highlighted the impact of BoC rate cuts and USD strength on USD/CAD's bullish momentum. With the latest trade war developments, the pair has now breached a 22-year high, reinforcing expectations of continued upside unless policy shifts alter the trend.
