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World’s central banks double down on Canada’s loonie

The Canadian dollar (loonie) is pictured in Vancouver, Sept. 22, 2011. THE CANADIAN PRESS/Jonathan Hayward

The Canadian dollar may be losing value against its U.S. counterpart, but central banks around the world still seem to like it.

The International Monetary Fund’s latest report on foreign exchange reserves shows official holdings of Canadian dollars rose nearly 2.4 per cent in the third quarter to US$112.5 billion compared to three months earlier.

In fact, the loonie has seen a 23.5-per-cent boost among 145 reporting countries since the fourth quarter of 2012. It wasn’t until then that the Canadian dollar started to show up on the radar of the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER).

It’s not a huge surprise given that Canada was considered a “darling of the global economy,” during the global financial crisis, said Benjamin Tal, deputy chief economist at CIBC World Markets.

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“Canada is closer than any other developed country to a balanced budget and it is well positioned to take advantage of the recovery in the global economy,” Tal said in an email to Yahoo Canada Finance.

“This has not escaped the attention of central banks that made it very clear that they want to diversify their U.S.-dollar holdings. This process will probably will continue in 2014, but a slower pace.”

The IMF’s currency statistics come as the Canadian dollar ends the year down about 7 per cent, at around 94 cents U.S.

The loonie pushed above par in early 2011 and bounced between $1.05 and 95 cents U.S. until a few weeks ago.

Economists predict the Canadian dollar to fall further in 2014, to about 90 cents U.S., driven down by a strengthening U.S. economy versus more tepid growth expected in Canada.

The Bank of Canada is forecasting Canada’s gross domestic product to increase by a modest 2.3 per cent in 2014, which is still up from its forecast of 1.6 per cent for 2013.

Earlier this month, Statistics Canada reported foreigners were slowing their investment in Canada, while data from the Commodity Futures Trading Commission showed the short position against the Canadian dollar was at $5.4 billion, the largest amount since the spring.

That implies a negative sentiment among investors. However, central banks tend to be longer-term investors.

The IMF data shows U.S.-dollar reserves increased 1.4 per cent between the second and third quarter, to $3.8 trillion, making it the most dominant holding for a single currency.

U.S. dollars accounted for 61 per cent of COFER holdings in the third quarter, according to the IMF, compared to 1.8 per cent of Canadian dollars.