Canadian Dollar weakens as trade tensions flare and risk appetite fades

• The Canadian Dollar weakens against the USD for the third consecutive day.
• US President Trump extends reciprocal tariff deadline to August 1 and warns of new duties up to 40% on 14 countries.
• Ivey PMI jumps to 53.3, signaling renewed expansion in Canadian business activity.

The Canadian Dollar (CAD) gives up its intraday gains against the US Dollar (USD) on Tuesday, pressured by a stronger Greenback amid renewed trade tensions. Market sentiment turned cautious after US President Donald Trump extended the reciprocal tariff deadline to August 1 from July 9 and warned of sweeping new duties targeting over a dozen countries. The hawkish trade tone lifted demand for the safe-haven US Dollar, weighing on the commodity-linked Loonie.

The USD/CAD pair is ticking higher during the American trading hours. At the time of writing, the pair is trading around 1.3685, hovering near Monday's high after recovering from an intraday low of 1.3638. The rebound comes as traders digest the latest tariff developments and broader market risk sentiment.

At the same time, the US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, is edging higher, trading near 97.70, staging a mild recovery from three-year lows as investors digest the latest US reciprocal tariffs.

Tariff tensions are back in focus after US President Donald Trump posted official letters on his social media platform, Truth, warning of new reciprocal tariffs on 14 countries, including Japan, South Korea, and South Africa. The proposed duties, ranging from 25% to as high as 40%, are set to take effect on August 1 if no trade deals are reached.

However, Canada has not been included in this global tariff extension, thanks to its separate bilateral trade agreement with the United States. That said, Ottawa remains under pressure to conclude a new security and economic partnership deal with Washington by July 21. In the meantime, Canada continues to face existing US tariffs on key exports, including steel, aluminum, automobiles, and fentanyl-related products, which keep trade relations between the two allies under strain.

Adding to the mix, the latest Ivey Purchasing Managers Index (PMI) surprised to the upside, offering a glimpse of strength in Canada's economic activity. The headline PMI rose to 53.3 in June, up sharply from 48.9 in May, marking the highest reading in four months and indicating renewed expansion. Despite the positive PMI headline, the Canadian Dollar struggled to capitalize, with traders more focused on external headwinds and global risk sentiment.

Looking ahead, all eyes will be on the FOMC meeting minutes, due to be released on Wednesday, which could offer fresh clues on the Federal Reserve's policy path amid growing global trade tensions. Any sign of caution or delayed rate cuts may further support the US Dollar. On the Canadian side, attention will turn to the monthly employment report on Friday, which will provide insight into the health of the domestic labor market.