OTTAWA--The Canadian dollar weakened and government bond yields fell in early Monday trading as investors reassess Canada's economic outlook amid trade talks between Ottawa and Washington collapsed and the likelihood of escalated tariffs loomed.

With no trade pact over the weekend, the U.S. imposed 50% tariffs on about $20 billion of Canadian imports, and Prime Minister Mark Carney vowed to retaliate with tariffs on U.S. imports after Labor Day. Economists say the limited scope of the new 50% tariffs won't necessarily derail Canada's economic backdrop--but the duties do add another thick layer of uncertainty and are likely to weigh on tenuous business confidence.

The Canadian dollar fell about 0.60% in value relative to the U.S. dollar after trading started overnight in Asia. One U.S. dollar is currently worth C$1.3842, compared with the C$1.3760 range at the end of last week--when the Canadian dollar was trading at a roughly three-month high.

Canadian government bond yields also fell across the curve.

The trading might reflect a belief that the Bank of Canada will be firmly on hold while policymakers take stock of the impact from the new round of tariffs. Prior to the latest trade escalation, the Canadian economy appeared to have turned the corner. Data this week is expected to show second-quarter growth of 3.5% annualized following 12 months of stalled output. Bank of Canada officials were somewhat confident that businesses were learning to live with uncertainty.

Even so, central bank policymakers indicated they were unsure the recent momentum had staying power, according to minutes describing deliberations ahead of their July 15 decision to keep the policy rate unchanged at 2.25%. The minutes indicate that officials recognized that the possibility of U.S. tariffs "was an ever-present downside risk to growth."

The direct hit on Canada's growth should be manageable, said Karl Schamotta, chief market strategist at global payments company Corpay. However, "the duties could prove devastating for thousands of small and medium-sized firms that sell mainly into the U.S., and will raise economic uncertainty once again--threatening to derail a nascent recovery and cap the [Canadian dollar's] gains."

Small firms most affected by the U.S. tariffs include those selling machinery and equipment, wood and building products, plastic and packaging, food and beverages, and arts, jewelry and creative products, according to the Canadian Federation of Independent Business, a lobby group.

"An escalating trade war will be a negative for business sentiment, and run counter to our assumption that the worst economic hit would be behind us soon," said Avery Shenfeld and Andrew Grantham, economists at CIBC Capital Markets. "If we wanted to find a silver lining in that scenario, it's that ratcheting up the pressure on exporters in both directions might help push the parties to get back to the negotiating table."

The CIBC economists said their forecast for 2027 growth of 2% assumed there would be a dialing down of tariffs and no further tariff increases from either the U.S. or Canadian governments. "We might be more in the 1.5% range when we fine tune that call in the coming weeks," they said.