USD/CAD holds gains near 1.4350 amid escalating trade tensions
- USD/CAD strengthened due to rising trade war tensions as Trump expanded tariffs on steel and aluminum imports.
- President Trump raised import duty on steel and aluminum imports to a flat 25% without exceptions or exemptions.
- Canada’s Industry Minister condemned the tariffs as “totally unjustified” and stated, “Our response will be clear and calibrated.”
USD/CAD extends its gains for the second successive day, trading around 1.4330 during the Asian hours on Tuesday. The pair appreciated due to escalating trade tensions after US President Donald Trump significantly increased tariffs on steel and aluminum imports to a flat 25% on Monday, with no exceptions or exemptions. The move aims to support struggling domestic industries but raises the risk of a multi-front trade war.
Trump signed proclamations raising the US aluminum tariff rate from 10% to 25%, eliminating country exemptions, quota deals, and hundreds of thousands of product-specific tariff exclusions for both metals. A White House official confirmed the new measures would take effect on March 4, with further action on microchips and vehicles under consideration in the coming weeks.
Canada supplied nearly 80% of US primary aluminum imports in 2024. Steel imports made up approximately 23% of US steel consumption in 2023, with Canada, Brazil, and Mexico as the top suppliers.
Canada’s Industry Minister Francois-Philippe Champagne condemned the tariffs as “totally unjustified,” emphasizing that Canadian steel and aluminum play a vital role in key US industries such as defense, shipbuilding, energy, and automotive manufacturing. "We are consulting with our international partners as we examine the details. Our response will be clear and calibrated," he stated.
The US Dollar Index (DXY), which measures the US Dollar’s value against six major currencies, extends its gains for the fourth successive session and rises to near 108.50 at the time of writing. The Greenback receives support as the US Federal Reserve (Fed) is now expected to keep interest rates steady this year, following January’s jobs report released on Friday, which indicated slowing job growth but a lower Unemployment Rate.
A Reuters poll of economists now suggests the Federal Reserve will delay cutting interest rates until next quarter amid rising inflation concerns. Many who had previously expected a March rate cut have revised their forecasts. The majority of economists surveyed between February 4-10 anticipate at least one rate cut by June, though opinions on the exact timing remain divided.
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.