The Canadian dollar weakened to its lowest level in a week against its US counterpart on Tuesday after renewed US tariff threats against Canadian goods prompted investors to scale back expectations for further interest rate hikes by the Bank of Canada this year.

The Canadian dollar, commonly known as the loonie, fell 0.2% to C$1.4104 per US dollar, or 70.90 US cents, marking its weakest level since last Tuesday.

US tariff concerns weigh on Canadian rate expectations

On Monday, US President Donald Trump announced a 50% tariff on a broad range of Canadian imports, citing what the US administration described as discriminatory treatment of American automobiles, alcoholic beverages, and dairy products in the Canadian market. The new tariffs are scheduled to take effect on August 19.

Kevin Ford, FX and macro strategist at Convera, said the Canadian dollar's weakness appears to be driven more by shifting interest rate expectations than by direct concerns over tariffs.

"The 30-day window before the latest US tariff threat takes effect gives markets reason to view it as another negotiating tool rather than an imminent breakdown in trade relations," he said.

Yield gap with the US widens despite higher oil prices

Swap markets now indicate investors expect just 13 basis points of additional rate hikes from the Bank of Canada by December, down from 16.5 basis points before the tariff announcement and 18 basis points before weaker-than-expected Canadian inflation data released on Monday.

Ford said the Canadian dollar continues to trade primarily as a reflection of broader macroeconomic forces, including interest rate expectations, growth differentials, and policy uncertainty, rather than as a currency-specific story.

Meanwhile, the US dollar strengthened against a basket of major currencies after the latest attacks in the Middle East pushed oil prices higher, reinforcing concerns that inflationary pressures could persist. US crude oil futures rose 2.5% to $85.31 a barrel.

In the bond market, Canadian government bond yields declined across the curve, with the two-year yield falling 2.7 basis points to 2.812%. The spread between Canadian and equivalent US two-year yields widened by 6.9 basis points to 144.5 basis points, the largest gap since May 2025.