US Dollar Surges to 2003 Highs Against Canadian Dollar Amid Trade War Fears Trump’s Tariffs Shake Global Markets

US Dollar Surges to 2003 Highs Against Canadian Dollar Amid Trade War Fears

Trump’s Tariffs Shake Global Markets

The U.S. dollar has reached levels against the Canadian dollar not seen since 2003, as trade tensions escalate following President Trump’s latest tariff announcement. The weekend unveiling of tariffs has sent shockwaves through financial markets, triggering volatility across major currency pairs.

The USD/CAD exchange rate surged as the EUR/USD dropped to 1.02, reflecting the dollar’s broad strength. The sharp rise comes as markets react to the U.S. government imposing up to 25% tariffs on Canadian and Mexican goods, along with 10% additional duties on Chinese imports. However, Canada’s energy exports to the U.S. will face a lower 10% tariff, providing some relief to the sector.

Canada, Mexico, and China Respond with Retaliatory Measures

In response, Canada has swiftly imposed 25% retaliatory tariffs, while Mexico has signaled its own countermeasures, with further details expected soon. Meanwhile, China has pledged to take “necessary countermeasures” and has already begun legal proceedings against the United States at the World Trade Organization (WTO).

These tariffs affect a significant portion of global trade, as Canada, Mexico, and China collectively account for 40% of all U.S. imports, equating to approximately $1.35 trillion in trade. The impact could push the average U.S. import duty rate from 2.3% to 10%, significantly increasing costs for American businesses and consumers.

Market Reactions: Stocks Drop, Oil Rises

Financial markets have reacted strongly to the tariff announcement. While some anticipated the move, many hoped for last-minute negotiations to avert the escalation. The Canadian dollar and Mexican peso weakened, with the USD/CAD breaking to levels last seen in 2003.

Despite prior warnings about potential tariffs in November and early February, investors remained cautiously optimistic that Trump would reconsider. However, with implementation set for February 4, 2025, time for negotiations is running out. As ING analysts noted:

“The new tariffs will be enforced at 12:01 a.m. Eastern Standard Time on February 4, 2025. Given the lack of clear demands from the U.S. regarding Canada, Mexico, and China’s role in the fentanyl crisis, reaching an agreement before the deadline appears challenging.”

Meanwhile, the European Union is also under threat, with Trump confirming that EU tariffs are inevitable and will be implemented soon. This statement caused further declines in the EUR/USD, which fell 1% to 1.026 on Monday, after hitting an intraday low of 1.02. Analysts predict a potential return to parity for the euro.

Treasury Yield Stability and Upcoming QRA Announcement

Despite inflation concerns, U.S. Treasury yields have remained surprisingly steady. However, markets are awaiting further developments, particularly from the U.S. Treasury Secretary Scott Bessent’s first Quarterly Refunding Announcement (QRA) later today. This report will outline the government’s borrowing strategy and financing needs for the next quarter.

While the QRA would typically dominate headlines, the focus remains on trade war fears and the U.S. dollar’s rally. As markets brace for further developments, traders and investors will closely watch diplomatic negotiations, economic data releases, and central bank responses in the coming weeks.