Ways to hedge the dollar

Share

Last November, a friend of mine took a trip to Florida with her family of four. She had budgeted for the vacation based on a fairly strong Canadian dollar. The loonie was trading around $0.95 (U.S.) throughout September and October. By mid-November, however, the dollar's value had dropped to $0.78.

"We got caught last year," my friend recalls, "and it ended up costing us more than I thought it would."

For her family's Florida getaway this year, she has carefully hedged against changes in currency. She has been buying U.S. dollars throughout the year - a "dollar cost averaging" strategy that means she won't be stuck with the exchange rate at the time of the trip.

My friend also opened up a U.S. dollar bank account and signed up for a U.S. dollar credit card to use on her vacation.

With the volatile exchange rate between the U.S. and Canadian dollars, more Canadians are looking at these kinds of strategies, according to Ashif Ratanshi, RBC's head, Branch Investments, Deposits and Direct Investing.

"Every time the dollar strengthens, people use this approach to buy U.S. dollars and hold it in an account instead of buying it only when you need it," he says.

If you travel across the border often for work, shopping, and vacations, or as a winter snowbird, a U.S. dollar savings account and credit card could help you save money.

Look for an account with low or no fees that lets you take advantage of exchange rates when they are favourable and where you can gain interest. Some will also allow you to purchase U.S. dollars through online banking at a preferential rate by simply making a direct transfer from your Canadian dollar bank account to your U.S. savings account.

"Even if you have just $20 coming back from your U.S. trip, why keep it in your purse or at home in a drawer?" Mr. Ratanshi says. "Put it in the account."

RBC offers a U.S. savings account with no monthly fee and no minimum balance requirement. While the interest rate is not high - it's currently pegged at 0.15 per cent - it's comparable to other banks' U.S. dollar accounts.

Scotia's U.S. dollar savings account carries no fee provided you keep a minimum balance of $200 (U.S.) balance, but there is a tiered interest rate and no interest for balances under $1,000.

At CIBC, the U.S. personal account has no monthly fee and the tiered interest rate starts at 0.05 per cent for balances under $3,000 (U.S.). TD Canada Trust's U.S. savings account also has a tiered rate that starts at 0.05 per cent for balances over $1,000 (U.S.).

Frequent U.S. travellers may also want to consider a U.S. dollar denominated credit card. This lets you to buy goods in U.S. funds and avoid any surprises when you get the credit card bill. Typically, purchases made on Canadian dollar credit cards get exchanged at a mark-up rather than at the posted exchange rate.

One friend, who cross-border travels and shops in the U.S. frequently, signed up for a U.S. dollar credit card after a bad experience with a merchandise return. A few years ago she bought a $400 (U.S.) bag while on a trip, but decided to return it the next day. "The difference in price for me to buy it and return it due to the foreign exchange rates applied to VISA was like $50," she says. "I felt robbed."

My friend now uses her U.S. dollar denominated card for online shopping as well.

She pays off the card balance electronically using U.S. funds from her U.S. dollar bank account. "I just bought $1,500 to put into my U.S. chequing account as I am going on a trip soon to the U.S. and I wanted to capitalize on the strong exchange."

For Canadian consumers, there are a number of choices for U.S. dollar credit cards. Bank of Montreal, CIBC, RBC Royal Bank, and TD CanadaTrust all offer cards with annual fees ranging between $25 (U.S.) and $65. Each has different features, so do your homework to choose the one right for you.