U.S. Commerce Secretary Wilbur Ross said on Monday that anti-subsidy tariffs averaging around 20 percent would be imposed, affecting $5 billion worth of imports of softwood lumber imports from Canada, Reuters reported.
In total, Canada exported around C$8.6 billion (around $6.37 billion) worth of softwood lumber in 2015, according to Canadian government data, which indicated the country was the world's fourth-largest forest product exporter.
In 2015, the U.S. imported a total of $325.4 billion in goods and services from Canada.
Khoon Goh, senior foreign-exchange strategist at ANZ, said there could be scope for more weakness in the loonie, particularly if it fell below C$1.36 against the dollar.
"It's not just the lumber," he said, noting the U.S. administration had also been rumbling about potential tariffs on dairy products. "Any further escalation of this situation between the U.S. and Canada could well see the Canadian dollar weaken further."
In 2016, Canada exported around C$112.6 million (around $83 million) worth of dairy products to the U.S., while it imported around C$557.3 million worth of dairy products from its Southern neighbor, according to Canadian government data.
Goh noted that the news appeared to have also depressed the Mexican peso. The U.S. dollar was trading under 18.48 pesos before the news broke, but rose as high as 18.8410 pesos afterward.
"It's really the sentiment around it," Goh said, noting that trade concerns had eased after the U.S. declined to label China a currency manipulator earlier this month.
"It appeared the U.S. administration was backing down on earlier trade threats. Suddenly, it's announced [tariffs] on Canadian products. Concerns were raised once again on the potential for trade frictions," he said.
During the presidential campaign, Trump also threatened trade tariffs on Mexico.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1