CANADA FX DEBT-Canadian dollar hits 5-year low as oil tariff decision looms

Updates market pricing and details on activity

By Fergal Smith

TORONTO, Jan 30 - The Canadian dollar tumbled to a near five-year low against its U.S. counterpart on Thursday and bond yields fell as U.S. President Donald Trump repeated his threat of hefty tariffs on goods from Canada and Mexico, potentially dashing hopes that the import taxes could be avoided.

The loonie CAD= was trading 0.5% lower at 1.45 per U.S. dollar, or 68.97 U.S. cents, after hitting its weakest level since March 2020 at 1.4592 in a volatile move.

Trump said he would likely decide by the end of the day whether to put a 25% tariff on imports of Mexican and Canadian oil that would take effect on Feb 1.

"Confusion reigned for a few minutes on the headlines," said Adam Button, chief currency analyst at ForexLive, adding that there was an initial impression among traders that Trump was in the process of signing executive orders on the tariffs which led to a brief bout of market panic.

"Later, as it became clear as he was once again threatening tariffs, much of the move faded but not all of it. The market reaction shows how on edge everyone is around tariffs," Button said.

Remarks on Wednesday by U.S. Commerce Secretary nominee Howard Lutnick had brought some calm to the Canadian dollar market that proved short-lived. Lutnick said Canada and Mexico could avoid the tariffs if they acted swiftly to close their borders to fentanyl.

The Mexican peso MXN= was trading 1.1% lower at 20.7260 per U.S. dollar.

The Bank of Canada on Wednesday said a tariff war could cause major economic damage as it cut its benchmark interest rate by 25 basis points. Most of the loonie's decline in recent months was due to rising uncertainty around trade policies, the central bank said.

Canadian bond yields fell across the curve. The 2-year was down 5.9 basis points at 2.738%, while it was trading 4.4 basis points further below the equivalent U.S. yield to a gap of about 147 basis points. That's the largest gap since September 1997.