Why It Matters for Canadian and U.S. Investors

When the U.S. dollar strengthens against other currencies, its effects reach portfolios across the globe. For Canadians, this could mean changes in the value of U.S. stocks within a portfolio, while American investors may see impacts on global purchasing power and the performance of multinational companies. Let’s break down the implications of a strong U.S. dollar for Canadians and Americans alike, including strategies to navigate currency risk effectively.

Impact of a Strong U.S. Dollar on Canadian Investors

Canadian investors who hold U.S. assets, such as stocks or ETFs, can see significant portfolio shifts when the dollar strengthens. Suppose you invested in a U.S. stock like Apple with a CAD/USD exchange rate of 1.25. At that rate, a $10,000 USD investment in Apple would have cost $12,500 CAD. Fast forward to today’s exchange rate, now closer to 1.35, and that same $10,000 USD in Apple stock would be worth approximately $13,500 CAD, simply due to the currency shift.

However, this can work in reverse as well. If the U.S. dollar weakens, that same investment could lose value when converted back to Canadian dollars. This volatility can make it challenging to predict the true value of U.S. holdings in a Canadian portfolio.

To mitigate these fluctuations, Canadians may consider currency-hedged ETFs. A currency-hedged fund adjusts for changes in the U.S. dollar relative to the Canadian dollar, providing more stable returns. For example, the Vanguard S&P 500 Index ETF (CAD-hedged) helps Canadian investors maintain U.S. equity exposure while reducing the risk of currency fluctuations.

How a Strong Dollar Affects U.S. Investors

A robust U.S. dollar can make international purchases and travel cheaper for Americans, increasing global buying power. However, a strong dollar can negatively impact U.S.-based companies that rely on international sales. When the dollar appreciates, revenue earned abroad is worth less when converted to USD.

Take Coca-Cola as an example. With over half its revenue coming from outside the U.S., Coca-Cola feels the impact of a strong dollar significantly. Suppose Coca-Cola earns $100 million from European markets. At an exchange rate of 1 USD = 1 EUR, that revenue would equate to $100 million USD. If the dollar strengthens to 1.1 USD = 1 EUR, that same revenue now translates to only $90.9 million USD. As a result, Coca-Cola’s overall earnings appear lower, impacting its stock price.

For U.S. investors, this means that while domestic travel and international goods may be cheaper, the value of certain investments, especially in companies with a strong global presence, may be negatively affected.

Real-Life Scenarios for Managing Currency Risk

Canadians Holding U.S. Investments

Suppose a Canadian investor bought shares in Tesla when the CAD/USD exchange rate was 1.25, and Tesla’s stock price was $800 USD per share. At that time, each share would have cost them approximately $1,000 CAD. With the current exchange rate at 1.35, the same Tesla stock, even if the price remains $800 USD, is now worth around $1,080 CAD. This currency gain might tempt you to cash out for the exchange-related profit, but remember that the reverse could also occur. If the U.S. dollar drops back to 1.25, you would lose that additional value.

If you prefer to avoid this volatility, investing in a CAD-hedged S&P 500 ETF might be a solution. This type of fund will give you the performance of the S&P 500 without the fluctuations from the currency exchange, providing more consistency for long-term Canadian investors.

U.S. Investors in International Markets

Let’s imagine an American investor holding shares in Canada’s TD Bank. TD Bank pays dividends in CAD, so the amount you receive in USD varies with the exchange rate. If TD Bank pays a CAD dividend of $1 per share and the rate is 1 USD = 1.35 CAD, the American investor would receive around $0.74 USD per share. Should the U.S. dollar weaken to 1.25, that same dividend now provides $0.80 USD per share.

This fluctuation in dividend income may be less predictable for Americans investing internationally, so diversifying across sectors or choosing assets with less currency exposure can help balance out risks.

Strategic Tips for Both Canadian and U.S. Investors

Currency-Hedged Funds: Canadian investors may want to consider U.S. equity funds that offer currency hedging. This option provides the returns of the U.S. market without worrying about exchange rate fluctuations.
Sector Choices: Industries like technology often have more domestic revenue, so companies like Amazon or Meta may be less affected by international currency shifts. If you’re concerned about the impact of a strong dollar on your portfolio, technology and other domestically oriented sectors may offer some protection.
Geographic Diversification: Both Canadians and Americans can benefit from diversifying geographically. By spreading investments across multiple countries and currencies, you balance currency risks and capture global growth potential.
Monitoring Dividend Impact: For American investors with holdings in Canadian or other foreign dividend-paying companies, keep in mind that your income may vary based on currency shifts.

For Canadians and Americans, understanding the influence of a strong U.S. dollar on their portfolios is crucial. Whether it’s exploring currency-hedged funds or adjusting sector choices, managing currency exposure can help both protect your investments and take advantage of potential opportunities. By staying informed about exchange rates and actively balancing your portfolio, you can navigate the complexities of currency fluctuations with confidence.

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