Canadian dollar slips as trade tensions, Fed outlook keep loonie under pressure

The Canadian dollar faced a significant drop on Friday, marking its largest weekly decline in over two months, as a stronger U.S. dollar and Federal Reserve Chair Kevin Warsh's comments pressured the loonie. Trading at around C$1.3900 per U.S. dollar, the currency slipped by approximately 0.3%, or 71.94 U.S. cents. The decline occurred despite Canada's economy expanding at a 3.3% annualized rate in the second quarter, a significant rebound from the first quarter and the strongest growth since 2023.

However, this robust performance was overshadowed by escalating trade tensions between Canada and the U.S. Investors are increasingly concerned about the potential impact of new U.S. tariffs and Canada's retaliatory measures on economic growth in the second half of the year. The situation was exacerbated by Warsh's remarks, which increased the likelihood of a 25-basis-point September rate hike to about 57.5%, up from 35% previously.

The U.S. dollar index rose by 0.6% to 99.69, its highest level since August 17, further weakening the Canadian dollar. The currency remains vulnerable due to the breakdown of Canada-U.S. trade talks, which have renewed concerns about the outlook for Canadian exports and growth. The Bank of Canada is expected to maintain its overnight rate at 2.25% at its September 2 meeting and hold it through at least the third quarter of 2027, according to a Reuters poll of 35 economists.

This decision reflects uncertainty stemming from the suspension of trade negotiations with the U.S. and concerns over the impact of weaker trade on growth.