The Indian rupee hit a record low during early trade on February 3, falling to over 87 against the US dollar, compared to its previous close of 86.6162.

This decline came in the wake of a surge in the dollar index, following the announcement of US tariffs on several nations.

The dollar index, which tracks the value of the US dollar against six major global currencies, rose to 109.825 in early trade, up from 108.370 in the previous session.

The tariffs have led to crashes across crypto and equity markets.

India’s benchmark Nifty 50 was also down 0.79% to trade at 23,295.75 on Monday.

Investor sentiment has been impacted by concerns over higher inflation after the US imposed new tariffs over the weekend.

The market decline comes amid worries that the Federal Reserve may delay potential interest rate cuts.

Trump’s tariffs fuel the dollar’s strength

US President Donald Trump’s announcement on January 31 that the US would impose a 25% tariff on imports from Mexico and Canada and a 10% tariff on goods from China beginning February contributed to the stronger dollar.

During the signing of executive orders, Trump dismissed any possibility of delaying the tariffs, stating, “No, no. Not right now, no.”

Trump also stated that the tariff on Canadian oil would be 10%, in contrast to the 25% tariff on other goods from the country, but warned that wider tariffs would be applied to oil and natural gas by mid-February.

Outflows from Indian equities have further weighed on the Indian rupee, with the currency being affected by foreign institutional investors (FIIs) potentially increasing selling activity due to a stronger dollar.

In the last 30 days, FIIs have sold Indian equities worth over ₹86,000 crore (around $10 billion).

Finance minister defends INR’s performance

In response to criticism regarding the rupee’s depreciation, Finance Minister Nirmala Sitharaman on Sunday dismissed concerns.

In an interview with the Indian news agency PTI, she emphasised that the rupee’s weakness is primarily due to the strengthening US dollar.

She stressed that India’s macroeconomic fundamentals are strong.

Sitharaman also acknowledged the 3% depreciation of the rupee in recent months, noting that while it makes imports more expensive, she rejected criticisms of widespread rupee weakness.

She reiterated that the currency’s stability against other global currencies is a testament to India’s strong economic fundamentals.

The rupee has faced pressure in recent months.

Several factors, including the widening trade deficit and the surge in the dollar index due to hints from the US Federal Reserve about fewer rate cuts in 2025, have contributed to the rupee’s decline.

To defend the rupee from further sharp declines, the Reserve Bank of India (RBI) is reported to have spent $77 billion from its foreign exchange reserves, bringing India’s foreign reserves to $629.557 billion in January, down from $701.176 billion on October 4, 2024.

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A new trade war has begun, and this time, the stakes are higher than ever.

President Donald Trump has imposed massive tariffs on Canada, Mexico, and China, triggering immediate retaliation and a market backlash.

The cost of cars, food, energy, and housing is about to rise, businesses are preparing for disruption, and analysts warn this could push North America into recession.

The markets are now shaking and it looks like the repercussions for the global economy could be massive.

How the trade war escalated: A timeline of key events

On February 1st, the White House declared a 25 percent tariff on all imports from Canada and Mexico, along with a 10 percent tariff on Canadian oil and Chinese goods.

The administration justified the move as a national security measure to combat illegal immigration and fentanyl trafficking. Within hours, Canada and Mexico retaliated, setting the stage for an economic standoff.

Prime Minister Justin Trudeau responded immediately, announcing retaliatory tariffs on $107 billion worth of US goods, including alcohol, fruit, clothing, household appliances, and lumber.

At the same time, Mexico’s President Claudia Sheinbaum announced countermeasures, though the full details remain undisclosed.

Markets took a hit, with both the Nasdaq and the Dow Jones dropping significantly, and Bitcoin slipping below $100,000.

China entered the fray by filing a complaint with the World Trade Organization and threatening further countermeasures.

A North American trade war?

The White House claims these tariffs are about national security, but Trump’s trade strategy has always been about economic leverage.

He argues that America’s trade partners benefit unfairly, pointing to a $1 trillion trade deficit in goods in 2023 as justification for these aggressive tariffs.

This is not just an economic dispute—it’s a political gamble.

Trump is using tariffs as both a weapon and a negotiating tool. His believes that America’s trading partners will blink first.

The problem is, that history shows that tariffs rarely achieve their intended goals. Instead, businesses pay more, consumers pay more, and entire industries suffer.

What’s at stake?

The US, Canada, and Mexico form one of the most interconnected economic zones in the world. Now, those ties are being severed—and the consequences will hit hard.

One of the biggest industries affected will be automobiles. Ford, GM, and Stellantis rely heavily on Canadian and Mexican manufacturing.

About 40% of Stellantis’ US car sales come from Mexico and Canada, and for GM and Ford, the numbers are 30% and 25% respectively.

Now, these companies must either absorb a 25% tariff or pass the cost on to consumers.

Analysts predict that prices of imported cars could rise by $10,000, while even US-assembled vehicles—many of which contain Canadian and Mexican parts—could see price hikes of $1,250.

This could slash auto sales by 7.5%, or 1.1 million vehicles, next year alone.

The food industry is also at risk. The US imports $45 billion in agricultural goods from Mexico and $40 billion from Canada each year, including beef, pork, grains, tomatoes, and strawberries.

Tariffs will push up food prices, while Canada and Mexico’s retaliation—which targets US produce, alcohol, and consumer goods—will further increase costs.

Energy markets won’t be spared either. Canada supplies 60% of the US’s refined crude oil, and while the White House only imposed a 10% tariff on energy imports to avoid a fuel price shock, even this smaller duty will increase fuel costs for consumers.

And then there’s construction. One-third of the US’s softwood lumber is imported from Canada, meaning tariffs will push up home prices.

Cement imports from Mexico—crucial for US infrastructure—will also become more expensive. In a market where housing affordability is already a crisis, this could be the tipping point.

Canada and Mexico are ready to fight back

If Trump expected Canada and Mexico to fold under pressure, he was wrong.

Trudeau called the tariffs “an act of economic warfare” and responded by imposing 25% tariffs on $107 billion worth of US goods.

Canada’s response was strategically targeted to hit American businesses where it hurts—alcohol, fresh produce, consumer goods, and critical raw materials.

Mexico, meanwhile, hasn’t disclosed its full countermeasures yet, but early reports suggest that key US exports—including pork, cheese, steel, and aluminum—will be taxed heavily.

And then there’s China. Beijing announced that it will file a WTO complaint and hinted at restricting exports of rare earth minerals, which are critical for US tech and defense industries. If China moves forward, companies like Apple and Tesla could be caught in the crossfire.

The question now is whether the European Union and Japan will get involved. Trump has already hinted that he may expand tariffs to the EU, which could turn this into a global economic conflict.

What happens next?

This trade war isn’t just about tariffs—it’s about political power. Trump has made it clear that these tariffs will remain in place until the “border crisis is solved”—a vague condition with no clear definition or end date.

For Canada and Mexico, this means looking for alternative markets. Canada is already pushing for deeper trade ties with China, the EU, and emerging markets like India and the UAE.

Mexico is exploring stronger partnerships in South America and Europe to reduce its dependence on the US.

For US businesses, the damage will be immediate. Manufacturers are warning that higher costs will lead to layoffs, and retailers are preparing for higher consumer prices.

The stock market has already taken a hit, and if inflation rises, Trump’s tariffs could end up hurting American voters more than they help.

The real danger is that this trade war may not stop here. If Trump extends tariffs to the EU or Japan, the world could be thrown into a full-scale economic crisis—one that could last far beyond his presidency.

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The USD/CAD exchange rate surged to a high of 1.4792 on Monday, its highest level since 2003 and over 67% from its lowest point in 2007. It has jumped by over 10% in the last 12 months as the Canadian dollar crash accelerated. So, how low can the loonie crash amid the ongoing Trump tariffs?

2 reasons why the Canadian dollar is crashing

The Canadian dollar has crashed this year for two main reasons. First, there are risks that the economy will go through a major slowdown as the USMCA trade agreement becomes undone. Donald Trump has started a new trade war by imposing a 25% tariff on most Canadian goods and a 10% on its energy.

Canada has responded by announcing targeted tariffs on American goods worth over $180 billion. Chrystia Freeland, the former finance minister, has warned that Canada should place a 100% tariff on Tesla, a move that will hurt Elon Musk, Donald Trump’s close confidant. 

These tariffs will have a negative impact on the Canadian economy which has been slowing in the past few years. Recent data showed that the unemployment rate remained high, while the economy expanded by 1% in the third quarter on a YoY basis. It also dropped for six straight quarters.

Therefore, a trade war with its biggest trading partner will likely lead to more weakness this year as business costs soar. 

Fed and BoC divergence

Second, the Canadian dollar has crashed because of the ongoing divergence between the Federal Reserve and the Bank of Canada (BoC).

The Fed has delivered just three rate cuts, bringing the official cash rate to between 4.25% and 4.50%. It has also hinted that it will deliver just two interest rate cuts this year as it remains concerned about the country’s inflation.

A report released last week showed that the personal consumption expenditure (PCE) rose to 2.6%, while the core report remained intact at 2.8%. These numbers remain above the Fed’s target of 2.0% and are struggling to get to the bank’s target of 2.0%. 

The Fed may also be forced to increase interest rates if inflation remains at an elevated level because of Trump’s tariffs. The challenge, however, is that hiking rates at a time when the economy is slowing may affect the economic growth.

On the other hand, the Bank of Canada (BoC) has slashed interest rates several times, making it one of the most dovish central banks in the developed world. It will likely react to the tariff threat by delivering more interest rate cuts. 

Sustained rate cuts by the BoC will expand the carry trade opportunity, where investors borrow from low-interest rate countries and invest in higher-yielding ones.

USD/CAD technical analysis

USDCAD chart by TradingView

The weekly chart shows that the USD/CAD exchange rate has been in a strong bullish trend in the past few years. It recently jumped above the key resistance level at 1.3912, the upper side of the ascending triangle pattern. 

The pair has now retested the key resistance level at 1.4675, the highest swings in March 2020 and January 2016. It has remained above the 50-week and 100-week moving averages, while the Relative Strength Index (RSI) has tilted upwards. 

Therefore, the USD/CAD pair will likely continue rising this year, with the next point to watch being the psychological point at 1.5000, up by almost 2% from the current level.

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