Published March 20, 2025 • 4 Min Read
This article was originally published on RBC Direct Investing.
If you’ve ever travelled abroad, you’ve likely felt the impact of exchange rates. Before heading to the register or ordering a meal, you do the mental math to decide if you’re getting a deal or paying more than you would at home.
The same dynamics are at play in a portfolio that holds investments in a currency other than Canadian dollars. However, an investor with a smart strategy may be able to make exchange rates work in their favour – and at times, that impact can be significant.
“Currency exposure is often an afterthought for investors, but it’s been a huge tailwind for Canadians who are invested down south,” explains Dan Mitchell, Senior Portfolio Manager on RBC Global Asset Management’s Global Fixed Income and Currencies team. That’s because when the loonie is falling relative to investments held in a foreign currency, as has been the case with the U.S. dollar in recent years, it boosts the value of your investment when converted back into Canadian dollars.
Where the loonie stands globally
At times you might hear the dollar referred to as being weak or strong, but that’s a little misleading. That’s because currencies always trade in pairs – with one currency being compared to another. The dollar might look strong when paired with one currency but weak against another. Typically, though, most of the time currencies are compared to the U.S. dollar.
The Canadian dollar is currently languishing at a five-year low relative to its U.S. counterpart. There are several reasons for that. For starters, the U.S. has had stronger economic growth, higher interest rates and more attractive equity returns over that period, which has encouraged investors to buy U.S. dollars to invest in that country. At the same time, demand for the Canadian dollar has been sliding as the country has been cutting rates while grappling with high consumer debt levels and lower productivity, explains Mitchell.
The brewing tariff war that the U.S. recently initiated against Canada could put further pressure on the loonie, says Mitchell, with some companies opting to delay investments until the dust settles. But that’s just the loonie versus the greenback. It’s a different story when you compare the Canadian dollar to other currencies.
Although the Canadian dollar has been losing ground relative to the U.S. dollar, it has been relatively unchanged compared to the euro, the pound or the yen, explains Mitchell. “For the past six months, there’s been very little distinguishing one currency from another; they’re all really reflecting the performance of the greenback”, he says. “It’s very unusual for currency markets to be in such tight ranges.” While there are still differences between the loonie and other major currency markets, the fact that those fluctuations are more muted relative to the U.S. dollar means the exchange rate will have less of an impact on your returns if you have investments in Europe or Japan.
Watch the trends
Regardless of how frequently you trade assets in a foreign currency, don’t overlook the impact the exchange rate can have on your return. Even with the loonie testing multi-year lows, Mitchell notes it’s important to know that currencies tend to cycle over time.
Given that the Canadian dollar is very cheap next to the greenback, investors need to consider whether it has much more room to fall and weigh that against the risk to their U.S.-dollar holdings if the loonie starts to strengthen. “It’s always been important for investors to consider exchange rates, but it is certainly important right now.”
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