Update: Bloomberg is reporting that a US official has clarified that the new tariff threshold is NOT intended to apply to USMCA-compliant goods, suggesting that the impact on the Canadian economy could be far smaller than might otherwise have been the case. Our admittedly-unscientific estimates suggest that roughly 80 percent of Canadian exports to the US could ultimately meet the qualification criteria needed to escape the new levies. The loonie’s losses are beginning to moderate, although the exchange rate remains more than 40 basis points below this afternoon’s closing level.

The Canadian dollar is tumbling once again after President Donald Trump threatened to impose a 35-percent tariff on imports from Canada, effective August 1.

In a letter to Canadian Prime Minister Mark Carney, posted on his social media platform, Trump claimed that the increase is needed to stop the flow of fentanyl from Canada into the US, and to address the country’s trade deficit with its northern neighbour. The 35-percent levy appears to replace the existing 10- and 25-percent tax applied to products that do not fall under the existing sectoral tariff schedule, but the letter does not clarify whether products considered compliant under the United States – Mexico – Canada Agreement will be subject to the new levies.

The US dollar is climbing against most of its major peers and volatility assumptions are ratcheting back up as traders brace for more turbulence ahead. A letter to the European Union is expected to come shortly, and the president separately told NBC News that imports from any countries that had not received a letter from him would be subject to “blanket” tariffs ranging from 15 to 20 percent.

Traders remain broadly convinced that the president will ultimately fail to follow through on his threats, but this may not be a safe assumption: in a clear indication that placid financial markets are encouraging ever more extreme threats, Trump said “I think the tariffs have been very well-received. The stock market hit a new high today”.

The full text of the letter is enclosed below:

“Dear Mr. Prime Minister:

It is a Great Honor for me to send you this letter in that it demonstrates the strength and commitment of our Trading Relationship, and the fact that the United States of America has agreed to continue working with Canada, despite Canada having financially retaliated against the United States. As you will recall, the United States imposed Tariffs on Canada to deal with our Nation’s Fentanyl crisis, which is caused, in part, by Canada’s failure to stop the drugs from pouring into our Country. Instead of working with the United States, Canada retaliated with its own Tariffs. Starting August 1, 2025, we will charge Canada a Tariff of 35% on Canadian products sent into the United States, separate from all Sectoral Tariffs. Goods transshipped to evade this higher Tariff will be subject to that higher Tariff. As you are aware, there will be no Tariff if Canada, or companies within your Country, decide to build or manufacture product within the United States and, in fact, we will do everything possible to get approvals quickly, professionally, and routinely – In other words, in a matter of weeks.

If for any reason you decide to raise your Tariffs, then, whatever the number you choose to raise them by, will be added onto the 35% that we charge.

Also, I must mention that the flow of Fentanyl is hardly the only challenge we have with Canada, which has many Tariff, and Non-Tariff, Policies and Trade Barriers, which cause unsustainable Trade Deficits against the United States. Canada charges extraordinary Tariffs to our Dairy Farmers — up to 400% — and that is even assuming our Dairy Farmers even have access to sell their products to the people of Canada. The Trade Deficit is a major threat to our Economy and, indeed, our National Security!

If Canada works with me to stop the flow of Fentanyl, we will, perhaps, consider an adjustment to this letter. These Tariffs may be modified, upward or downward, depending on our relationship with your Country. You will never be disappointed with The United States of America. Thank you for your attention to this matter!”