The strengthening Canadian dollar largely erased healthy stock market gains in the second quarter, according to RBC Dexia.

Canadian pensions earned 0.9% in the quarter ended June 30, 2007, bringing year-to-date totals to 2.9%—a lacklustre return, although still ahead of inflation.

Although domestic stocks returned an impressive 6.3% in the quarter, the dollar’s dramatic rise against most major currencies prevented most Canadian pension plans from benefiting from buoyant equity markets outside the country.

“Currency fluctuations have assumed crucial significance for pension plan sponsors,” says Don McDougall, director advisory services at RBC Dexia. “Foreign stocks now account for about half of the typical pension plan’s strategic equity allocation, but most plans do not hedge their foreign currency exposure.”

The MSCI World index’s healthy 6.0% rise in local currency terms translated into a loss of 1.8% for the quarter, once Canadian exchange rates were taken into account.

Over the quarter, Canada’s dollar appreciated almost 8.0% against a basket of world currencies, including 8.3% against the U.S. dollar, 6.8% against the Euro and 13.2% against the yen.

Canadian pension plans also saw domestic bond holdings lose 1.8% over the quarter, as anticipation of interest rate hikes triggered a sell-off, shaving 0.1% from the Scotia Capital Universe Bond Index.

Longer duration bonds had their worst quarterly showing in 13 years, while Canadian real return bonds suffered the most, declining 3.5% in value.

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