How will the falling US dollar affect my investments?
June 27th, 2008 | by Editor |This question has been posed to many Canadian financial advisors. We’ve spoken with some, who offered this advice:
Living in a border community, we are keenly aware of US exchange rates, and the recent decline of the American dollar against our Loonie might appear to be beneficial to those shopping or vacationing in the USA (two of our favorite past-times). However, the effect on our overall economy is less beneficial. Manufacturing operations (such as car parts) cannot compete, and many are forced to close their doors.
There are economists who feel we may see parity between the two currencies, mostly due to stronger oil prices, an expectation of rising interest rates and our enviable economic and fiscal stability. For the record, the last time this happened was in the 1970’s, and it’s a huge departure from just a few years ago when the Loonie hit a rock-bottom low exchange of nearly 60 cents.
While the Dow hits record highs, there doesn’t seem to be much talk in the US media about the weakened Greenback. This could be because a cheaper US dollar lowers the cost of US exports, making those products that are “made-in-America” less expensive in global markets. Everyone agrees that the US is in need of more exports to reduce their gigantic trade deficit.
A few years ago, US markets were doing well, but the declining US dollar was erasing those gains for Canadian investors. Most managers of funds holding US assets are keenly aware that investors don’t like seeing results like these and have been more closely monitoring the fluctuating currency and how it relates to their holdings. There have been a fair number of investments introduced recently which provide “currency hedging.” This is a portfolio management technique which creates a gain in one part of a portfolio to offset a currency loss in another part of the portfolio, effectively creating a nil result. Remember though, when investing in currency hedged investments, any positive impact of currency changes are negated too.
Overall, you should not let the changing currency deter you from investing internationally. While our Canadian markets have performed admirably in recent years, they are heavily weighted to resources and financial services, and represent only a sliver of the world’s companies. And many investors may be surprised to know that even with our stellar performance of late, we have not been the top performer in any calendar year for quite some time.
So the message remains, keep the diversification in your portfolio, and remember to always think long term.
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