By Michael O’Neill

The United States once owned diplomacy which is the art of negotiating and building relationships between nations. After World War II, America set the gold standard—championing the United Nations and NATO, rebuilding Europe through the Marshall Plan, and brokering complex global deals. Its influence was rooted in military might, but also in humanitarian aid, alliance-building, and a genuine commitment to stability.

That diplomatic pace is far too slow for US President Donald Trump and humanitarian aid is for chumps. He believes the US has been taken advantage of by all its trading partners, resulting in a trade deficit of $1.2 trillion. He cannot be bothered to spend the time and energy required to negotiate new agreements with 71 trading partners.

Not Signed, Not Sealed, Just Threats
So, after promising to secure 90 trade deals in 90 days and failing miserably, he tried a different tack.  On July 8, he sent letters to the leaders of 14 countries, followed by another 7 on July 9. The letters announced the imposition of an arbitrary tariff rate if the country does not build or manufacture products in the US, effective August 1.

The words may have been written on diplomatic stationery, but it fits the definition of extortion—defined as obtaining something of value through threats, intimidation, or abuse of power.

That kind of strong-arm tactic might sound familiar. In The Godfather, Vito Corleone cloaked threats in words like “respect” and “favors.” Trump takes a similar approach—but with less finesse. As a gangster, he’s less Vito Corleone and more Harry and Marv.

The President Cried Wolf and Markets Howled
Trump also has a follow-through problem. His hyped “Liberation Day” tariffs, announced April 2, were set to kick in April 5 (10% baseline) and April 9 (reciprocal tariffs). But the April 9 tariffs were shelved the same day—first delayed to July 9, now bumped to August 1. The constant delays powered S&P 500 futures to a 10.25% gain between “Liberation Day” and July 9. At the same time, the US dollar index (DXY) dropped from 104.29 to 98.33 and it has a bearish bias.

Fed Ignores Trump
Trump has a view on interest rates which he tweeted on TruthSocial. “Our Fed Rate is AT LEAST 3 Points too high. “Too Late” is costing the US 360 Billion Dollars a Point, PER YEAR, in refinancing costs. No Inflation, COMPANIES POURING INTO AMERICA. “The hottest Country in the World!” LOWER THE RATE!!!”

Fed Chair Jerome Powell and his colleagues did not agree. The FOMC minutes reveal a Committee that is extremely uncertain about the timing and size of inflationary effects from Trump’s tariffs. They believe there is a lag between the tariffs and higher prices due to pre-tariff inventories. They are also concerned about “second-round” effects, with unrelated firms raising prices if complementary goods become more expensive.

Nevertheless, “a few” favoured cutting rates at the June 30 meeting, but recent US employment data probably changed their minds.

The President Cried “Resign Immediately”
President Trump wants Fed Chair Jerome Powell gone, but he cannot fire him easily because a Chair can only be removed “for cause” and not for a policy disagreement. Former Fed Vice Chair Lael Brainard wrote in The Washington Post on July 9 that Trump’s demand for Powell to cut rates is “one simple desire: to make it cheaper for the administration to add about $4 trillion to the federal debt.”

Revenge Best Served Cold
But Trump will get his way. Fed Chair Jerome Powell’s term ends in May 2026, and potential replacements are already lining up for what’s often called the “second most powerful job” in America—an independent position that controls the levers of monetary policy in the world’s largest economy. Names being floated include National Economic Council Director Kevin Hassett, current Fed Vice Chair Michelle Bowman, and Fed Governor Christopher Waller. The latter two openly advocated for a June 30 rate cut—a move a cynic might interpret as a blatant attempt to curry favour with Trump.

Loonie Threatened
The Canadian dollar has faced renewed pressure since early July with USDCAD rising as the US dollar regains strength. Even though WTI crude prices remain firm, the loonie’s weakness reflects a potent mix of US policy uncertainty and a distinctly dovish Bank of Canada. President Trump’s renewed tariff campaign and ongoing pressure on the Federal Reserve have injected ambiguity into the US policy outlook.

For Canada, the divergence in policy paths is a headwind. The Bank of Canada has already begun easing, cutting rates to 2.75% and signaling more may come, while the Fed remains cautious. That gap, combined with Trump’s “extortion” trade strategy, is biting into Canadian trade flows. Exports to the US have declined meaningfully—even if Canada was spared in the latest round of tariff letters.

With global volatility elevated and trade friction escalating, the Canadian dollar remains exposed. If the tariff drag spreads and growth slows further, the loonie won’t escape the fallout. For now, it’s holding—but the pressure is building.

And if extortion is the new diplomacy, then the loonie’s just collateral damage.