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Who wins and who loses from the falling greenback

The sinking U.S. dollar and its soaring Canadian counterpart are no black-and-white investing story. Spotting the shades of grey could be a key to navigating the financial markets this year.

The U.S. buck took another blow to the chin this week, sinking to its lowest levels since July, 2008, after the U.S. Federal Reserve Board unveiled its latest monetary-policy decision with no hint of interest-rate increases on the horizon. The prospect of indefinitely stilted U.S. rates is sending foreign-exchange traders to other options - including the Canadian dollar.

For investment strategists, the issue of who stands to win or lose from all these currency swings is increasingly pressing. Many of them are shining a light on the substantial differences, not just among markets but among segments of those markets, in exposure to the currency vacillations - differences that suggest a range of risks and opportunities.

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Currency weigh-in

A good source to see the anatomy of currencies is the Bank for International Settlements (BIS). It maintains exchange-rate indexes for a wide range of global currencies, using the actual patterns of international trade from recent years to generate weightings within each index, reflecting the relative amounts of trade that takes place with each foreign currency.

BIS's Canadian-dollar index is weighted 72 per cent to the U.S. dollar. But that's a reminder that 28 per cent of the loonie's trade-weighted value is not U.S.-dollar driven; its 10-per-cent exposure to the euro market should not be ignored.

The BIS U.S.-dollar index illustrates the greenback's diversification - and its substantial Canadian exposure. The loonie's 23-per-cent weighting is a close second to the euro's 26 per cent.

Exposing the exposed sectors

Some recent work by Peter Gibson, head of portfolio strategy at CIBC World Markets, illustrates that sectors within both the Canadian and U.S. equity markets face very different impacts from currency movements.

In Canada - where the Canadian dollar's rise implies a negative for exporting companies - the sectors with the biggest proportion of foreign revenues are materials, information technology and health care.

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But the fact is, the Canadian dollar hasn't risen against its other major trade-weighted currencies this year - only against the U.S. dollar. So, it makes more sense to consider the sectors' exposure specifically to U.S. revenues. In this case, technology and materials look much less at risk to a currency hit than their overall export exposure suggested.

In the U.S. market - where the weaker dollar boosts companies with large foreign revenues - the sectors with the biggest non-U.S. revenue streams are technology and materials.

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