USD/CAD tumbles below 1.4200 as US Dollar dives amid US recession fears
- USD/CAD has been hit hard by the escalating tariff war between the US and China.
- China imposes additional 34% on import duty on products from the US.
- Canada’s 25% counter-tariffs on autos from the US have come into effect on April 9.
The USD/CAD pair falls sharply to near 1.4180 during European trading hours on Wednesday. The Loonie pair faces an intense sell-off as the US Dollar (USD) takes bullet for United States (US) President Donald Trump raising import duty on China to 104%. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, tumbles to near 102.00.
On Tuesday, US President Trump increased reciprocal tariffs on China to 84%, following Beijing’s retaliation. Last week, China imposed a 34% levy on imports from the US as a retaliation against Trump’s reciprocal tariffs. Trump has also blamed China for manipulating their currency to offset the impact of higher duties.
During European trading hours, China has imposed additional 84% tariffs on the US, which will come into effect on April 10.
Financial market participants brace for a significant increase in inflation and a slowdown in the US economic growth as the brewing trade war between the US and China. This could lead to a sharp decline in US business activity, given the meaningful dependence of US importers on cost-effective products from China.
Fears of a US economic slowdown have led traders to raise bets supporting the Federal Reserve (Fed) to cut interest rates in the May meeting. The CME FedWatch tool shows that the probability for the central bank to cut interest rates in May has increased to 52.5% from 10.6% recorded a week ago.
Meanwhile, the Canadian Dollar (CAD) is expected to remain volatile as 25% counter-tariffs announced by the Canadian government last week have become effective from April 9. A spokesperson from Canada’s ministry said on Tuesday that these countermeasures will remain in place “until the US eliminates its tariffs against the Canadian auto sector".
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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