Currency
How Currency Fluctuations Impact Canadian Investors
How Currency Fluctuations Impact Canadian Investors
For many Canadians, currency movements are an everyday part of life.
When the Canadian dollar is strong, it means that going south of the border is cheaper. Whether it’s a vacation in Hawaii or a shopping spree in New York City, a strong Canadian dollar can buy more in terms of U.S. dollars.
Likewise, a weak Canadian dollar can buy fewer U.S. dollars – meaning that travel, shopping, and other expenses in U.S. dollars are more expensive.
The Same Effect
The impact of currency fluctuations isn’t limited only to foreign purchases.
In fact, as today’s infographic from Fidelity Investments Canada shows, these same fluctuations can also affect the performance of your portfolio.
Why is that the case?
Many Canadian portfolios have exposure to American-listed companies such as Apple, Wells Fargo, Tesla, or Johnson & Johnson. As a result, fluctuations in the USD/CAD rate can have a profound impact on how these investments perform in Canadian dollars.
How Does This Work?
Here’s an example of the impact of currency in action:
- A Canadian investor puts $100 CAD into a fund that buys U.S. stocks
- At the time of investment, $1 CAD buys $0.80 USD
- After exchange, $80 USD is invested in the U.S. market
- The U.S. market goes up 10% in one year, and is now worth $88 USD
- However, over the year, the exchange rate changed to $1 CAD per $0.85 USD
- Converted back to Canadian dollars, at the new rate, the $88 USD is now worth $103.52 CAD, which is just a 3.5% gain in domestic Canadian currency
In the above case, a strengthening Canadian dollar ends up dampening the returns coming from the U.S. market.
In contrast, if the exchange rate went the other direction – meaning Canadian dollar was weakening – any returns would actually amplify.
Long-Term Planning
If currency fluctuations can have a substantial impact on investments, what does this mean for portfolio construction and assessing risk?
There are two main schools of thought on this:
Hedged: Some funds use a hedging strategy to try and cancel out any currency fluctuations. Ideally, the end result of this would be representative performance of the U.S. market.
Unhedged: This strategy does not try to anticipate currency fluctuations, since the long-term effects of currency movements tend to even out over time.
According to Fidelity Investments Canada, over the 20-year period of November 28, 1997 to November 30, 2017, the impact of currency fluctuations on the S&P 500 had a difference in annualized returns of 0.5%.
In other words, U.S. dollars invested in the S&P 500 had a 7.2% return, while Canadian dollars invested in the same stocks had a 6.7% return after adjusting for exchange rates.
Finance
De-Dollarization: Countries Seeking Alternatives to the U.S. Dollar
The U.S. dollar is the dominant currency in the global financial system, but some countries are following the trend of de-dollarization.

De-Dollarization: Countries Seeking Alternatives to U.S. Dollar
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The U.S. dollar has dominated global trade and capital flows over many decades.
However, many nations are looking for alternatives to the greenback to reduce their dependence on the United States.
This graphic catalogs the rise of the U.S. dollar as the dominant international reserve currency, and the recent efforts by various nations to de-dollarize and reduce their dependence on the U.S. financial system.
The Dollar Dominance
The United States became, almost overnight, the leading financial power after World War I. The country entered the war only in 1917 and emerged far stronger than its European counterparts.
As a result, the dollar began to displace the pound sterling as the international reserve currency and the U.S. also became a significant recipient of wartime gold inflows.
The dollar then gained a greater role in 1944, when 44 countries signed the Bretton Woods Agreement, creating a collective international currency exchange regime pegged to the U.S. dollar which was, in turn, pegged to the price of gold.
By the late 1960s, European and Japanese exports became more competitive with U.S. exports. There was a large supply of dollars around the world, making it difficult to back dollars with gold. President Nixon ceased the direct convertibility of U.S. dollars to gold in 1971. This ended both the gold standard and the limit on the amount of currency that could be printed.
Although it has remained the international reserve currency, the U.S. dollar has increasingly lost its purchasing power since then.
Russia and China’s Steps Towards De-Dollarization
Concerned about America’s dominance over the global financial system and the country’s ability to ‘weaponize’ it, other nations have been testing alternatives to reduce the dollar’s hegemony.
As the United States and other Western nations imposed economic sanctions against Russia in response to its invasion of Ukraine, Moscow and the Chinese government have been teaming up to reduce reliance on the dollar and to establish cooperation between their financial systems.
Since the invasion in 2022, the ruble-yuan trade has increased eighty-fold. Russia and Iran are also working together to launch a cryptocurrency backed by gold, according to Russian news agency Vedmosti.
In addition, central banks (especially Russia’s and China’s) have bought gold at the fastest pace since 1967 as countries move to diversify their reserves away from the dollar.
How Other Countries are Reducing Dollar Dependence
De-dollarization it’s a theme in other parts of the world:
- In recent months, Brazil and Argentina have discussed the creation of a common currency for the two largest economies in South America.
- In a conference in Singapore in January, multiple former Southeast Asian officials spoke about de-dollarization efforts underway.
- The UAE and India are in talks to use rupees to trade non-oil commodities in a shift away from the dollar, according to Reuters.
- For the first time in 48 years, Saudi Arabia said that the oil-rich nation is open to trading in currencies besides the U.S. dollar.
Despite these movements, few expect to see the end of the dollar’s global sovereign status anytime soon. Currently, central banks still hold about 60% of their foreign exchange reserves in dollars.
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