Skip to main content

The Canadian dollar’s days are numbered, and the recent strength provides a wonderful opportunity for diversifying into a currency that shows far more promise over the longer term. The best bet: The U.S. dollar. It’s clearly heading upward, providing a nice tailwind to dollar-denominated stocks and bonds.Ryan Remiorz/The Canadian Press

You have to hand it to the Canadian dollar. It has demonstrated remarkable pluck over the past six months, defying expectations that its days are numbered.

But guess what? Its days are numbered, and the recent strength provides a wonderful opportunity for diversifying into a currency that shows far more promise over the longer term.

The best bet: The U.S. dollar. It's clearly heading upward, providing a nice tailwind to dollar-denominated stocks and bonds.

A few years ago, this sort of argument would make many investors shudder. The U.S. economy was struggling to break out of the Great Recession, and the Federal Reserve was experimenting with all sorts of wacky monetary policies designed to stimulate growth – lowering its key interest rate to zero per cent, printing money and buying $85-billion (U.S.) worth of bonds each month.

Gold investors loved it. Surely these experiments would end badly: Inflation will surge and the U.S. dollar will tank, sending gold prices to miraculous heights.

But the doomsday scenarios haven't played out. Gold has tumbled 30 per cent from its record highs in 2011. And while the U.S. economy is hardly buzzing, these days, it is looking better than everything else – Canada included.

"Evidence is mounting that U.S. growth is gathering serious momentum, to the point that the economy may have finally reached so-called escape velocity – i.e. where underlying activity is strong enough to be self-generating, and no longer in need of a huge assist from policy stimulus," said Douglas Porter, chief economist at BMO Nesbitt Burns, in a note.

The Fed has been steadily unwinding its monthly bond-buying activities as unemployment slides toward five-year lows. It is only a matter of time before it starts raising its key interest rate, with mid-2015 a likely starting point.

That should propel the U.S. dollar higher.

The key here is that the rest of the world looks ugly in comparison, driving central banks to pursue monetary policies that push their currencies lower.

The euro zone economy continues to struggle against threats of deflation and recession, prompting the European Central Bank this week to cut its key interest rate to just 0.05 per cent and look to a bond-buying program of its own.

Japan appears no better, despite aggressive economic reforms and stimulus designed to pull the economy from decades of dismal performance.

And Canada? Here, employers shed an alarming 11,000 jobs in August and the unemployment rate has failed to improve over the past year, offsetting strong exports and decent economic growth. Economists still don't know if the Bank of Canada's next move will be to raise interest rates or lower them.

Add it up, and the United States stands alone with an improving economy and the likelihood of higher interest rates a year from now, giving a one-two boost to the currency. As economist Gary Shilling put it: "On balance, the U.S. dollar is the global winner."

There are many ways to get on-side with this winner, besides stuffing wads of Jacksons, Grants and Benjamins into your mattress.

You can buy U.S.-dollar denominated money market funds, which provide a tiny yield as you wait for those greenbacks to blossom.

For a higher yield, you can also venture into Treasury bonds: The iShares 7-10 Year Treasury Bond ETF, an exchange-traded fund, currently yields about 2 per cent – although rising interest rates will likely hurt the unit prices.

Or consider U.S.-listed stocks, especially ones that have a history of raising their dividends every year. If the payouts, the share prices and the U.S. dollar rise together, you'll be laughing.

Instead of picking just one stock, I've invested in the SPDR S&P Dividend ETF, which tracks 60 dividend-gushers. No currency hedges for me: I'm embracing the U.S. dollar, and not letting go.