The Canadian dollar plunged more than half a cent and fell back below 71 cents U.S. after incoming U.S. president Donald Trump said he will impose a 25 per cent tariff on Canadian and Mexican imports over border and drug issues.

The loonie fell 1.34 per cent Monday night to 70.52 cents U.S. — lows not seen since mid-2020 — after Trump made the comments on his social media platform.

“This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!” Trump wrote on Truth Social.

The Canadian dollar recovered slightly but continued to trade below 71 cents U.S. on Tuesday morning.

David Rosenberg, the founder of Rosenberg Research and Associates, said the downside risks remain high.

“The Canadian dollar, having broken down to C$1.4127 has little technical support now until the C$1.47 mark (68 cents U.S.),” Rosenberg said in a note to clients. “Looking at the chart there is simply nothing but dead air from here to there.”

Rosenberg added that a falling loonie should not be an obstacle to more Bank of Canada rate cuts, given that businesses are less concerned about inflation than they were a year ago.

Markets expect the Bank of Canada to continue cutting interest rates — including a 25 basis-point decrease when it meets Dec. 11 — putting the bank on a different path than its U.S. counterpart. It is uncertain whether the Fed will cut again this year.

A higher interest rate will draw more investors to the U.S. dollar. The U.S. dollar index — a basket of currencies including the loonie measured against the greenback — is up 3.23 per cent since Nov. 5.

Some, however, think the loonie is overreacting to the tariff threat.

“We suspect these moves will ultimately look overdone, with the cold commercial logic of international trade and domestic price pressures prevailing in reducing the tariff burden that actually reaches implementation,” said Karl Schamotta, chief market strategist of Corpay Currency Research, in a note to clients Monday night.

Schamotta said the tariffs could hit a number of “strategic” U.S. industries, swell taxes by US$272 billion, inflate the prices of goods, boost interest rates and hurt consumers.

“But for now, markets are likely to take shelter, with participants hedging themselves against further uncertainty. Volatility expectations are — quite justifiably — ratcheting higher across most major currency pairs, helping to boost the dollar in relative terms,” Schamotta said.

In a note this morning, Schamotta said that a 70 cents U.S. Canadian dollar is “in scope before year end.”

Rosenberg, however, warned Canadians, especially those heading south this winter to get ahead of events.

“Best for the snowbirds to book their winter trip to Florida now if they have yet to do so,” he said.

• Email: gmvsuhanic@postmedia.com

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