Wed 20 Feb 2008
The U.S. currently holds the privilege of carrying the de facto world currency. Their system is so very much entrenched into the rest of the world, that fluctuations in the currency of the world's largest importer reach us all. The Canadian Loonie sits in the front row of the Dollar's roller coaster, as the United States absorbs 80% of Canada's exports. Canadians need to be aware of how the U.S. dollar affects our investments.
Take a look at Intel last year. Over the course of the year they moved their share price from 20.45 to 26.28, a very respectable 28.5% on the initial investment. Over the exact same time period the USD/CAD currency pair went from 1.1664 to 0.9820. If a Canadian were to invest $2385 of Canadian funds on Jan 1 2007, to get 100 shares of Intel, and sold them exactly one year later, they would have $2580 once the hard earned US Dollars were converted back to Canadian currency. A gain of $195 or about 8%.
The currency exchanced cut the returns by more than two thirds. Throw in some fees and you've nibbled your excellent stock pick to virtually nothing. Because of this phenomenon, and this writers Bullish outlook on the USD, we're keeping our Canadian money north of the forty nineth.
The US Dollar is only going to get weaker over the coming couple of years. The Federal Reserve is printing money and slashing interest rates as fast as they can, and probably faster than they should. With the rates coming down, carry trades are becoming less attractive and currency traders are selling their purchased US dollars which is again increasing the supply of dollars in the international market. The dollar's slide, coupled with the United States growing deficit and overseas spending make a lot of people question how much value there is in the greenback.
For the time being, keep your money close to home.