Being able to use different currencies to pay for services or products on international platforms is a huge advantage. However, users can often notice differences in their options depending on the money type they choose or are limited to. For example, few people suffer the limitations when paying for their Netflix subscriptions. However, there is a considerable difference when trying to make a payment at a $10 deposit casino that accepts both USD and CAD.
These differences and limitations stem from broader economical and even historical contexts. In this post, we discuss some of the key differences between the Canadian and the US dollars.
Difference in Reserve Currency Status
A currency earns the label 'reserve currency' when central banks and governments widely adopt it to store big portions of their foreign exchange reserves. Typically recognized for its stability and reliability, the reserve currency plays a crucial role in worldwide trade and investment.
The US dollar is viewed as the foremost transnational reserve coinage. Whereas the Canadian dollar doesn't enjoy the same broad usage in global reserves, despite being pretty stable (but this is also influenced by historical factors and the way the economy is arranged).
The primary reserve currency designation for the US dollar traces its roots to the post-World War II period, marked by the Bretton Woods Agreement that instituted a fixed exchange rate system. In this arrangement, the USD assumed the role of the anchor money, backed by gold.
Despite the active trading of the Canadian dollar in the international markets and its significance in Canada's trade connections, it doesn't enjoy the same transregional reserve reputation as the US dollar, and this is where the historical difference becomes so obvious.
A considerable number of nations and central banks choose to reserve a notable chunk of their foreign exchange holdings in USD, a phenomenon known as 'dollarization.' This trend is influenced in part by the enduring stability of the US economy and the broad acknowledgment of the dollar in transnational payments.
The use of the Canadian dollar is mainly confined to Canada, though, without it being formally organized as the official money in other countries. (This also roots back to the fact that Canada has never colonized no one.)
The transregional trade arena favors the US dollar as the money of choice. The pricing and trading of most commodities, such as oil, gold, and other key resources, are conducted in USD, reinforcing its value and importance in worldwide exchanges.
The USD is used broadly in global financial markets, being the preferred denomination for various transnational payments, including loans and different financial instruments. Additionally, numerous cross-border payments and settlements take place in USD due to its stability but also the convenience of paying in the USD.
Given Canada's robust economic connections with the United States, the US dollar frequently assumes a more substantial role in facilitating even Canada's foreign transactions.
USD vs CAD in Currency Pegs
Currency pegging stands as a monetary policy approach when a nation opts to link the value of its local money to another prominent currency or a mix of currencies. The objective typically revolves around upholding stability in exchange rates and managing inflation. Choosing to peg currencies to the USD is a more prevalent practice than pegging them to the CAD.
Historically, the US dollar has earned a reputation for stability and broad acceptance in the global trade landscape. Countries opt to peg their currencies to the US dollar, seeking to leverage this stability and mitigate exchange rate fluctuations. When so many international payments are conducted in the USD, it makes sense for the country to peg its local money to the currency in wide use.
Although the Canadian dollar is actively exchanged in worldwide markets, it is not frequently chosen as a reference for other currencies. At the time of writing, no country in the world officially pegs its money to the CAD. The CAD itself, in turn, is connected to the oil price.
Another popular currency to peg local money to is the EUR.
It has to be mentioned that, of course, countries that peg their currencies to the US dollar often find themselves influenced by US monetary policy decisions. This includes changes in interest rates made by the Federal Reserve. This way, many countries’ economies can be suddenly impacted, without direct local reasons, by changes in the US.
Canada, being impacted by commodity prices, especially oil, can be impacted by in terms of the CAD worth. This volatility connected to commodity prices makes the CAD less attractive for currency peg.
Oil Pricing, or Petrodollar System
The US dollar's involvement in oil pricing stems from the petrodollar system, where numerous oil-producing nations, particularly those in the Middle East, determine the price and conduct sales of their oil in US dollars. As a reciprocal arrangement, these countries frequently reserve a substantial portion of their foreign exchange reserves in USD.
Canada stands as a prominent global oil exporter, too, boasting extensive oil sands and conventional oil reserves. The nation's economics is directly linked to the oil sector's performance but it also means that any fluctuations in the sector’s performance immediately impact the CAD. The value of the CAD often experiences influence from the fluctuations in global oil prices, as well, and this adds to the potential volatility.
Due to the prevalent use of US dollars in the majority of global oil transactions, the USD is commonly acknowledged as the global reserve coinage for oil and squeezes the CAD from this market. This tradition has historically persisted for decades, playing a significant role in establishing the USD's supremacy in the realm of global trade.
Being aware of its vulnerability, Canada has undertaken initiatives to broaden its economic base. Despite these efforts, the energy sector continues to impact the CAD performance a lot.
Regional Integration
The choice to adopt the USD as the official money in the country, known as dollarization, is frequently motivated by the pursuit of enhanced economic stability, lower inflation rates, and a boost in currency trust. The USD is renowned for its stability and widespread acceptance, so countries seeking ways to stabilize their economics can find this option attractive.
The CAD, compared to the USD, maintains its primary usage within Canada and is not designated as the official money in other nations. The Canadian dollar holds the official money status within the country only, and nowhere beyond its borders.
While opting for dollarization may bring economic advantages it also poses challenges. These challenges include higher control over monetary policy, as choices made by the US Federal Reserve can influence dollarized economies. Furthermore, the adoption of the US dollar may decrease a nation's capacity to address its unique local economic circumstances.
Canada, on the other hand, has full control over its economic circumstances in terms of not being so dependent on the USD but even Canada has a notable level of economic integration with the US. The two nations boast a substantial trading partnership, with the CAD frequently employed in cross-border transactions - let alone the USD. Canada, however, maintains authority over its monetary policy through the Bank of Canada and can customize its policies to its unique economic circumstances.
