Canadian dollar falls in face of U.S. softwood lumber duties

The value of the Canadian dollar tumbled on Tuesday morning after news that countervailing duties of up to 24 per cent will be placed on Canadian lumber exports to the U.S.

The looniebriefly fell to its lowest point against the U.S. dollar since February 2016 before recoveringsomewhat. The Canadian dollar closed at73.72 cents US at the end of Tuesday, according to the Bank of Canada's official closing rate, down 0.29 cents fromits Monday close of 74.01.

• U.S. imposes preliminary duties up to 24% on Canadian softwood lumber
• Quebec vows to protect forestry industry against 'unjustified' tax on softwood lumber
• Canada pursues possible trade deal with China as softwood lumber dispute with U.S. heats up

The U.S. is expected to impose a range of tariffs onCanadian lumber after an investigation by the U.S. Department of Commerce concluded those exports are unfairly subsidized. Those tariffs, which are expected to be in place early next week,are considered a threat to Canada's lumber industryand Canadian trade with the U.S. as a whole.

But at least one currency strategist argued that the strong reaction from currency traders may have been an overreaction.

"[Currency] markets are reacting as if this is the first shot in a tit-for-tat trade war between two of the world's closest trading partners but this may prove to be an overreaction," wrote Karl Schamotta of Cambridge Global Payments in a note to clients.

"This move is simply the latest shot in a decades-long battle between the two neighbours over what the United States considers unfair subsidies paid to Canadian lumber producers. Diplomatic missteps are possible in the days ahead, but this is not necessarily the prelude to a breakdown in relations between the two nations."

Dairy trade fears also weigh on loonie

The Trump administration's tough talk on lumber wasn't the only factor pushing the loonie down on Tuesday, said another currency strategist.

"It does look as though, with theNAFTAtalks coming up, that the U.S. is taking a bit more of a belligerent tone towards Canada as well,"said ColinCieszynski, chief market strategist at CMC Markets.

Cieszynski cited Donald Trump's aggressive new stance against the protected Canadian dairy industry, citing a Tuesday morning tweet from the U.S. president:

Trump's tweet came after a fiery speech in Wisconsinlast week that specifically targeted the Canadian dairy industry.

• What's Trump's problem with Canada's milk?

Cieszynski noted that the New Zealand dollar was also performing poorly against its U.S. counterpart on Tuesday. New Zealand's currency, Cieszynskisaid, is largely driven by trends in the global dairy industry.

"Yes, a lot of this is posturing ahead of talks on NAFTA, but still, I think the risk of bigger trade disputes is still out there, and the trading in the loonie is reflecting that today," said Cieszynski.