Canadian dollar gaining ground on world stage

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Still the top dog on the world stage, the U.S. dollar has been slipping of late — so much so that it recently raised a red flag in the presidential election.

Declaring that the greenback is “under major siege,” Republican candidate Donald Trump vowed to impose a 100 per cent tariff on goods from countries that move away from using it in international trade.

“I’ll say, ‘you leave the dollar, you’re not doing business with the United States. Because we’re going to put a 100 per cent tariff on your goods,’” he said at a rally in Wisconsin.

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In fact, the U.S. dollar’s dominance has been declining for awhile.

Its share in global foreign exchange reserves fell to 58.2 per cent in the second quarter of 2024, the lowest since 1995, say National Bank of Canada economists Warren Lovely and Kyle Dahms in a report out this week.

After a peak in 2001 of almost 73 per cent, the currency has been on a downward track, with a steep drop after the start of the COVID-19 pandemic.

While the share of other “super-majors” such as the euro and Japanese yen have stayed about the same, less traditional reserve currencies appear to be picking up the slack, said the economists.

Among them, the Canadian dollar stands out. No other currency has seen its share of allocated reserves grow faster over the past four years, the economists say. With its share increasing in 13 of the past 17 quarters, the loonie has surpassed the allocation to the Australian dollar and Chinese renminbi.

That share now stands at 2.68 per cent, up almost 1 percentage point from 2020 — and Lovely and Dahms say while that might not sound like much next to America’s lion’s share, it translates into a lot of dollars.

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“With [total] allocated reserves of about US$11.5 trillion, even the narrow(ish) slice allocated to CAD converts to C$420 billion,” said the economists.  “For a country the size of Canada that’s a veritable landslide of loonies.”

Foreign exchange reserves can include banknotes, deposits, treasury bills and other government securities, but there are signs that some of this official money is going into the Canadian dollar bond market, they said. Net foreign purchases here have set records this year.

“All this foreign interest in Canadian dollar product — from the official sector or elsewhere — has lent the loonie support, contributing to what is arguably an overvalued CAD,” said the National economists.

Currency market watchers expect the Canadian dollar, at 73.90 U.S. cents this morning, to stay pretty much on the path it’s been on.

Concern that a gap between Bank of Canada and U.S. Federal Reserve rates would put a lid on the loonie has dimmed, now that the Fed has started cutting.

CIBC Capital Markets expects the Canadian dollar to gain strength modestly in 2025 as the U.S. dollar weakens, ending the year at 75.75 U.S. cents.

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The TSX has been on a tear, outperforming the S&P 500 over the past three months. Robert Kavcic, senior economist at BMO Capital Markets, says during that time the index has climbed 10 per cent compared to 5 per cent south of the border.

The rally picked up speed in June after the Bank of Canada made its first interest rate cut. In July, the TSX broke through 23,000 points for the first time, and last week it breached 24,000, its 26th closing record so far in 2024.

Double-digit gains in utilities, financials and REITs offset weakness in the energy sector, said Kavcic.

“Dividend yields across much of this group, which looked just fine when 10-year GoC yields were hovering around 4 per cent a year ago, now look downright juicy with that yield below 3 per cent and the Bank of Canada easing quickly,” he said.

• Today’s Data: United States factory sales, durable goods orders
  
• Earnings: Constellation Brands Inc.

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