Looking to diversify your portfolio with foreign stocks? You might be wise to look north. This week Canada showed the world why it should be tops on the list of attractive investment destinations.

On Monday, investors were greeted with news that retail sales in November rose 5.5% from the prior year, well above the 4% that markets look for as a sign of strength. On Tuesday, the Bank of Canada raised its benchmark interest rate 0.25 percentage point to 3.5% and signaled that it is prepared to fight inflation by raising rates again when it meets in March. Meanwhile, national elections voted a pro-business government into power. Stephen Harper, a moderately conservative economist will soon be sworn in as prime minister, ending the Liberal party's 13-year lock on executive and legislative power.

Michael Woolfolk, senior currency strategist with the Bank of New York, says that the Canadian dollar is his "favorite currency of 2006" because of a supportive monetary policy that he believes will keep inflation at bay, as well as Canada's fiscal surplus, strong domestic consumer spending, robust investment from abroad and surging exports of energy and farm commodities.

The Canadian dollar trades around 0.865 U.S. dollars. Woolfolk expects it to rise above 90 cents by year's end.

"Investors can benefit from the strengthening of the Canadian dollar by investing in Canadian equities," says Woolfolk. He expects equities to climb 10% to 15% this year. U.S. investors will benefit doubly if the Canadian dollar strengthens further.

Woolfolk notes that Canada's energy sector has attractive investment opportunities. "We're expecting oil prices to rise, so stocks of energy companies or energy-related companies should continue to perform very well this year."

Companies that develop technology for alternative energy resources, or drilling equipment to access abandoned oil wells are also poised to do well, says Woolfolk. "That type of technology will be at a premium."

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