What a stronger Canadian dollar
means to your finances

If you hold U.S. stocks or mutual funds, you know what currency fluctuations can mean to your portfolio. Although U.S. equity markets posted strong returns in 2003, when those gains were converted back into Canadian dollars they weren't nearly as robust.

In contrast, those of us who travelled to the U.S. in the past eight months experienced the positive effects of a stronger Canadian dollar. Many economists are predicting an 80-cent Canadian dollar by year's end - which means the loonie may still have a bit more kick.

For some ways to protect your portfolio, and to read about the other implications of a strong Canadian dollar, click through the links below.

Who benefits, who faces challenges

The stronger Canadian dollar is a positive development for consumers of U.S. goods and services. Companies that purchase machinery, equipment, and technology from U.S. companies to improve their productivity can now do so at much more attractive prices.

Individual consumers also benefit. Snowbirds and other travellers are obvious winners. But even small transactions will reap rewards: If you're renewing a subscription to a U.S. magazine, for example, your dollars will go further.

On the other hand, companies that export to the U.S. have already had to confront some considerable challenges - namely, what they export now costs a lot more to the people who want to buy it. With the Canadian dollar expected to remain strong for the remainder of the year, these challenges are expected to continue.

Even smaller companies and consultants that serve U.S. clients will find that their U.S.-dollar fees buy fewer Canadian dollars.

Consider a U.S.-dollar account

If you travel frequently to the U.S., or make or receive payments in U.S. dollars, exchange rates and commissions can affect your currency transactions. To take the worry out of fluctuating currencies, a U.S.-dollar account may be a good idea.

Whether you're a snowbird, a frequent business traveller, or an investor looking to diversify your short-term savings, you can benefit from opening a U.S.-dollar savings account. Some of these accounts may allow you some commission-free transactions in U.S. dollars. And when you're not using those greenbacks, they collect interest for you.

How your investments are affected

When investing outside Canada, currency movements can affect your short-term returns. When you buy a European or an American mutual fund, for instance, you are hoping that the country's markets will advance and that its currency will rise - this would lead to enhanced returns when translated into Canadian dollars.

Last year, for example, U.S. equity markets posted impressive returns. But the U.S. dollar also declined against the Canadian dollar. So, for Canadian investors, the positive returns were diminished by the currency losses.

But this does not mean that investors should make changes to their portfolios based on currency movements. Currency markets can be extremely volatile in the short term. Investors should keep in mind that, over the longer term, currency movements have tended to be more modest.

Diversifying internationally is good advice in any investment climate (see our recent article "Are you a worldly investor") - and even more so today. Just one of the benefits of investing in foreign markets is that you gain some exposure to different world currencies, which can help to mitigate against currency fluctuations.

A global mutual fund, for instance, may invest in a number of countries and gain exposure to a basket of currencies. Some fund managers may even take special measures to lessen the impact of currency movements on their portfolios.

And those U.S. markets?

The consensus among economists is that the U.S. economy will outperform the Canadian economy this year, making the U.S. an increasingly attractive destination for foreign investors. What's more, the U.S. market is the world's largest, and presents opportunities that may not be available to Canadian investors.

In addition, the rise in the Canadian dollar is expected to be much more modest in 2004, which should reduce exchange-rate fluctuations. With the loonie's current strength, it's now cheaper to buy U.S. stocks and mutual funds than it has been in a while.

What should you do? Depending on your investment objectives and risk tolerance, now may be a good time to review the role that foreign investments, including U.S. stocks or mutual funds, can play in your portfolio.

Do you visit the U.S. frequently, or make or receive payments in U.S. dollars? You can save on currency exchange costs by setting up a Scotia U.S. Dollar Daily Interest Account. Click here for details.

Take the stress out of next year's RSP season today. Building your savings is easy with pre-authorized contributions. To find out more, click here.

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