Canadian dollar slips as trade tensions, Fed outlook keep loonie under pressure

The Canadian dollar weakened on Friday, heading for its steepest weekly decline in more than two months, as a stronger U.S. dollar after Federal Reserve Chair Kevin Warsh’s remarks outweighed a sharp rebound in Canada’s economic growth.

The loonie was trading around C$1.3900 per U.S. dollar, down about 0.3%, or roughly 71.94 U.S. cents. It earlier touched C$1.3908, its weakest level in nine days, as investors increased bets that the Federal Reserve could raise interest rates in September.

The currency’s decline came despite data showing Canada’s economy grew at a 3.3% annualized pace in the second quarter, sharply rebounding from the first quarter and marking its strongest quarterly expansion since 2023. The result was also above the Bank of Canada’s previous forecast of 2.5%.

The stronger economic data provided little support for the loonie because the second-quarter figures largely predated the latest escalation in Canada-U.S. trade tensions. Markets are increasingly focused on how new U.S. tariffs and Canada’s retaliatory measures could affect growth in the second half of the year.

The biggest immediate pressure came from the U.S. dollar. Warsh said the Fed would have more work to do if inflation does not show convincing progress toward its 2% target, prompting markets to raise the probability of a 25-basis-point September rate hike to about 57.5%, from 35% previously. The dollar index rose about 0.6% to 99.69, its highest level since Aug. 17.

The currency remains vulnerable after Canada-U.S. trade talks broke down last week, reviving concerns about the outlook for Canadian exports and economic growth. The loonie has nevertheless held relatively steady against the U.S. dollar compared with its performance against the Australian dollar, where the aussie recently climbed to a more than five-year high of C$0.9979.

Investors were also focused on Warsh’s speech at the Jackson Hole economic symposium, with markets looking for clues on the Federal Reserve’s interest-rate path. The dollar was holding near a one-week high on Friday as persistent inflation kept the possibility of a U.S. rate hike in play.

For Canada, the Bank of Canada is expected to keep its overnight rate at 2.25% at its Sept. 2 meeting and hold it there through at least the third quarter of 2027, according to a Reuters poll of 35 economists. The outlook reflects uncertainty created by the suspension of trade negotiations with the United States and concerns about the effect of weaker trade on growth.

That shift in U.S. rate expectations has widened the policy divergence between the two economies. The Bank of Canada is expected to keep its policy rate at 2.25%, limiting the scope for Canadian yields to rise alongside U.S. rates and leaving the loonie more exposed to dollar strength.