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The USD/CAD pair has dropped sharply, nearing 1.4100 during European trading, as the US Dollar declines due to recession concerns triggered by President Trump’s latest tariff strategy. The US Dollar Index (DXY) has fallen over 2% to approximately 101.30.
Market participants are reacting negatively to Trump’s protectionist measures, which are anticipated to negatively impact the US economy. Concerns include inflationary effects that may reduce household purchasing power and demand for durable goods.
Upcoming economic data, including the US Nonfarm Payrolls for March, will be closely watched, alongside the ISM Services PMI, expected to slow down to 53.0 from 53.5 in February. Despite Canada being exempt from certain tariffs, the Canadian Dollar is underperforming compared to its peers.
Upcoming Economic Catalysts
The US Dollar serves as the official currency of the United States and accounts for over 88% of global foreign exchange turnover, averaging $6.6 trillion daily. Its value is primarily influenced by monetary policy from the Federal Reserve, especially regarding interest rate adjustments.
Quantitative easing (QE) can weaken the US Dollar by increasing the money supply, while quantitative tightening (QT) typically strengthens it by halting bond purchases.
We’ve now seen the USD/CAD moving with pace, slipping closer to the 1.4100 threshold during early European sessions. This descent is largely being fuelled by a broader softening of the US Dollar, now under visible stress. The latest declines came on the back of a steep 2% fall in the DXY, which hovered around 101.30 at the last reading.
Impact Of US Tariff Strategy
The root concern stoking this response lies in the policy direction taken by Washington. Specifically, the latest wave of tariffs unveiled by Trump has unsettled financial markets—not because tariffs themselves are new, but due to what they imply about near-term economic policy. The direction is seen as inward-looking and, if maintained, might pressure both corporate margins and consumer sentiment. Market sentiment has adjusted accordingly, with traders dumping dollars in a bid to avoid longer exposure to possible demand destruction.
The main worry here isn’t that protectionist measures are being imposed; rather, it’s that they could speed up inflation at the wrong time. If import costs rise and those costs are passed on, families may cut back on discretionary spending. That could slow momentum in durable goods, shrink retail volume, and shave points off GDP growth before anything else has a chance to recover. Because inflation from tariffs is cost-driven and not demand-driven, it tends not to be good for broader stability. We’ve seen this dynamic play out before.
Canada, whilst spared from the sharpest impacts of the new tariffs, isn’t faring much better from a currency standpoint. Despite being exempt from direct measures, the Loonie is lagging behind its G10 peers. This underperformance suggests risk aversion isn’t working in CAD’s favour at the moment. There’s been no strong net inflow into Canadian assets despite the comparative advantage, which hints at deeper unease in the North American economic block. This disconnect should be watched over the next fortnight.
Looking ahead, there are two data points that we will focus on with care: the March Nonfarm Payrolls and the ISM Services PMI. If hiring sees a large drop—or even a moderation below expectations—forward-looking market participants are likely to dial up rate cut bets. The PMI easing only modestly to 53.0 from last month’s 53.5 won’t mark a collapse, but signals a trajectory that could draw more attention if it holds. A softening services sector impacts expectations around consumption, especially if labour growth falters in parallel. Those two readings combined could shift how markets treat the Fed’s next meeting.
It’s worth remembering that movements in the US dollar are almost always tied to real interest rates and monetary stance. The weight behind the greenback in global trade gives its path a sort of gravitational pull on everything else. When the Fed loosens policy—normally through measures like bond buying—the resulting liquidity can dilute the currency. The opposite filters through when liquidity is drawn out, especially during QT cycles.
In current volatility, liquidity conditions bear down hard on options pricing and futures carries. That needs to be modelled carefully. We’ve already seen volatility structures responding this week, showing clearer skews forming around expiry dates tied to macro events. Particular attention should be paid to weekly implieds around the payrolls release. Structuring exposure requires greater flexibility now that linear hedges are performing erratically.
Domestically, the Canadian economy isn’t providing any standout upside catalysts either. Oil has been range-bound, and Bank of Canada communications have not caught fire with the markets. Any resurgence in the Loonie will likely need either a broader USD retreat or a hard shift in risk appetite, both of which remain uncertain at best.
This isn’t a time to lean on static positioning expecting long-term reinforcement. Instead, we should be watching for recalibration among the majors. Gaps are likely to open around mid-tier data more easily now that attention is heightened. That means sharper responses to surprises, especially ones that come layered onto political developments.
The next few sessions should be approached with setups that allow for volatility. That means adjusting strike distances and perhaps opting for shorter tenors at least until NFP numbers are absorbed. There’s room for follow-through—but it likely won’t be in a straight line.
