USD/CAD tumbles below 1.4200 as US Dollar dives amid US recession fears

• USD/CAD has been hit hard by the escalating tariff war between the US and China.
• China imposes additional 34% on import duty on products from the US.
• Canada's 25% counter-tariffs on autos from the US have come into effect on April 9.

The USD/CAD pair falls sharply to near 1.4180 during European trading hours on Wednesday. The Loonie pair faces an intense sell-off as the US Dollar (USD) takes bullet for United States (US) President Donald Trump raising import duty on China to 104%. The US Dollar Index (DXY), which gauges the Greenback's value against six major currencies, tumbles to near 102.00.

On Tuesday, US President Trump increased reciprocal tariffs on China to 84%, following Beijing's retaliation. Last week, China imposed a 34% levy on imports from the US as a retaliation against Trump's reciprocal tariffs. Trump has also blamed China for manipulating their currency to offset the impact of higher duties.

During European trading hours, China has imposed additional 84% tariffs on the US, which will come into effect on April 10.

Financial market participants brace for a significant increase in inflation and a slowdown in the US economic growth as the brewing trade war between the US and China. This could lead to a sharp decline in US business activity, given the meaningful dependence of US importers on cost-effective products from China.

Fears of a US economic slowdown have led traders to raise bets supporting the Federal Reserve (Fed) to cut interest rates in the May meeting. The CME FedWatch tool shows that the probability for the central bank to cut interest rates in May has increased to 52.5% from 10.6% recorded a week ago.

Meanwhile, the Canadian Dollar (CAD) is expected to remain volatile as 25% counter-tariffs announced by the Canadian government last week have become effective from April 9. A spokesperson from Canada's ministry said on Tuesday that these countermeasures will remain in place "until the US eliminates its tariffs against the Canadian auto sector".