'They asked too much': Canadian dollar slides as Ottawa and Washington head for all-out trade war

The Canadian dollar fell on Monday morning after trade talks between Ottawa and Washington fell apart, leaving both sides facing higher prices on a wide array of imported goods and threatening Canada's economic growth.

The U.S. on Saturday slapped 50% tariffs on around $20 billion worth of imports from Canada, its second-biggest trading partner after Mexico. The affected goods span dairy, wine, wood products, furniture, cement, ceramics and a slew of other areas.

Canadian Prime Minister Mark Carney said he would retaliate "dollar for dollar" with tariffs starting Sept. 8, targeting sectors such as steel, dairy, agricultural equipment, paper and electronics. Details will be released "in the coming days," Carney added.

The Canadian dollar was 0.55% lower against the U.S. dollar at 7:30 a.m. ET. The loonie also dipped against the euro, British pound and Japanese yen.

"As a smaller, more open economy, Canada has more to lose from this, but Prime Minister Mark Carney seems to have opened the door to more fiscal stimulus to support affected business," FX strategists at bank ING wrote in a Monday note.

Bradley Saunders, North America economist at Capital Economics, told CNBC that Canada faced a bigger impact to its economy from the duties than the U.S. did.

"The high levy rate means the most exposed industries could be crippled," Saunders said by email, highlighting that there is no longer an exemption for goods that comply with production rules set out in the United States-Mexico-Canada Agreement (USMCA) — a trilateral deal that is currently under renegotiation — as there has been in previous rounds of tariffs since U.S. President Donald Trump's "Liberation Day" in April 2025.

Though the targeted goods only comprise around 0.6% of Canada's gross domestic product, "a collapse in exports would still be enough to push already-weak GDP growth back towards zero," he said.

"This would especially be the case if weaker US demand for finished items such as furniture and electrical equipment had knock-on effects on upstream primary industries, which are already struggling under the strain of Section 232 tariffs."

The situation could escalate further if Trump retaliates to Canada's countermeasures, Saunders added, estimating that extending the 50% tariffs to 20% of Canada's U.S. goods exports, from 5% previously, could knock around 2% from Canadian GDP and push it into recession territory.

Negotiators had been scrambling to strike a deal all week, with officials suggesting one was close. But rhetoric turned sour by the weekend, with each side blaming the other for failing to reach an agreement and of unfair trade practices.

The U.S. and Canada export tens of billions in agricultural products to one another each year, while their auto industries are deeply entwined. The U.S.'s $48.3 billion trade deficit with Canada is in large part due to its significant imports of Canadian natural gas, electricity and crude oil.