Canadian Dollar retreats as new US tariffs, softer-than-expected inflation weigh

USD/CAD trades on the front foot as tensions in the Middle East keep the US Dollar (USD) firmly bid, while the Canadian Dollar also faces pressure from renewed trade frictions with the United States.

At the time of writing, the pair trades around 1.4084, extending its gains for a second straight day.

US President Donald Trump announced a 50% tariff on nearly $20 billion worth of Canadian imports, equivalent to around 0.85% of Canada’s Gross Domestic Product (GDP). The tariffs are scheduled to take effect on August 19.

Canadian Prime Minister Mark Carney described the tariffs as a “direct violation” of the USMCA. However, he added that Ottawa remains committed to negotiations.

Meanwhile, softer-than-expected Canadian inflation data released on Tuesday supports the Bank of Canada’s (BoC) steady policy stance. Easing price pressures reduce the need for an interest rate hike, adding to the near-term headwinds for the Canadian Dollar.

On the geopolitical front, the US military carried out a tenth consecutive night of strikes against Iran on Monday, while Iran’s Revolutionary Guards targeted US military assets across the region.

Against this backdrop, the US Dollar continues to attract safe-haven demand, while Oil prices extend their rebound to the highest level in more than a month. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.10, extending its gains for a fourth consecutive day.

West Texas Intermediate (WTI) trades around $84.32 per barrel, up nearly 2.5% on the day. Higher Oil prices could lend support to the commodity-linked Canadian Dollar and limit the upside in USD/CAD.

Even so, diplomatic channels remain open. The Associated Press reported that Iranian officials began meeting with mediators in Pakistan on Tuesday. Reuters reported on Monday that mediators had offered Tehran a 10-day ceasefire aimed at bringing last month’s interim agreement back on track.