Canadian dollar weakens as BoC signals likely tariff response

TORONTO, Feb 21 (Reuters) – The Canadian dollar weakened against its U.S. counterpart on Friday as the greenback notched broad-based gains and the Bank of Canada provided a clearer signal it would cut interest rates to support the economy in the event of a trade war.

The loonie was trading 0.4% lower at 1.4230 to the U.S. dollar, or 70.27 U.S. cents, after trading in a range of 1.4169 to 1.4235. For the week, the currency was down 0.3%.

The Bank of Canada’s 2% inflation target should be maintained in a review set for 2026 as the central bank needs to focus on risks such as the imposition of U.S. tariffs, Bank of Canada Governor Tiff Macklem said.

“Provided the inflationary impact of tariffs is not too big, monetary policy can help smooth the (economy’s) adjustment by supporting demand so it doesn’t weaken too much more than supply,” Macklem added.

“Governor Macklem is finally saying the quiet part out loud,” Royce Mendes, managing director and head of macro strategy at Desjardins, said in a note.

“After having been non-committal about the likely monetary policy response to U.S. tariffs, he’s now being clearer that the central bank would likely cut rates more than it would have otherwise if a trade war erupts.”

Investors see a 43% chance of a March rate cut by the BoC, up from 33% before Macklem’s speech.

The U.S. dollar (.DXY), opens new tab clawed back some recent declines against a basket of major currencies, while the price of oil , one of Canada’s major exports, settled 2.9% lower at $70.40 a barrel.

Canadian retail sales grew by 2.5% in December from November as a sales tax holiday bumped up spending on food and beverages. A preliminary estimate showed sales slipping 0.4% in January.

Canadian bond yields moved lower across the curve. The 10-year was down 11.7 basis points at 3.094%.

 

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