(Bloomberg) -- The Canadian dollar was heading for its worst day against the US dollar in more than two months after trade talks between the two countries collapsed.

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The loonie fell as much as 0.6% to C$1.3844 versus its US counterpart, leading losses against all Group-of-10 currencies and on course for its worst performance since June 17. Selling could extend, as Washington's latest 50% tariffs on billions of dollars of Canadian goods threaten an economic pickup expected in the coming months, according to market watchers.

Prime Minister Mark Carney's pledge to match US duties "dollar for dollar" poses a further risk to investor confidence, said Derek Halpenny, head of research, global markets EMEA at MUFG, which forecasts the loonie sliding to C$1.41 per US dollar in the third quarter. "Downside risks will intensify the longer there is no resolution to this escalating trade war," he noted.

It marks a sharp turnaround for the currency, which had rallied since late June. Positioning in the Canadian dollar suggests the latest bout of selling has room to continue, according to CFTC data. Hedge funds have steadily trimmed bets on the loonie weakening over the past month after bearish positions hit a two-year high in late July, leaving scope to rebuild those wagers.

While swaps markets are pricing for around 70 basis points of interest rate hikes in Canada through June, a pullback in these expectations would keep the currency under pressure in the near term, said Elias Haddad, global head of markets strategy at Brown Brothers Harriman.

An escalating trade war would likely ease expectations for Canadian rate hikes in the coming months, but at the same time, Haddad pointed out that the risk of easing expectations for US interest rate hikes "should limit USD/CAD overshoots beyond 1.4000."

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