You will be able to name the main forces that push one currency up against another.
Siti is 27 and goes to Japan most years. Two years ago her holiday felt expensive. Last year, with the same hotels and the same food, it felt noticeably cheaper, and friends were posting about how far their Singapore dollars went in Osaka. Nothing about Japan's prices had changed much. The yen had. Siti wanted to know why, and whether it would last long enough for her to book another trip.
Nobody can tell her whether it will last. What this lesson gives you is the handful of forces that push one currency up or down against another, so a move like Siti's stops looking random.
Money moves around the world looking for a return. If one country's interest rates are much higher than another's, investors can earn more by holding deposits or bonds in the higher-paying currency. To do that, they first have to buy that currency, and the extra demand tends to push it up.
When the gap narrows, or reverses, the flow can turn. For several years, Japan kept its interest rates very low while US rates rose, and the yen weakened against the US dollar and against many other currencies, the Singapore dollar among them. That gap is a large part of why Siti's holidays got cheaper.
You saw the same pull from the other side in lesson 2.1, Why Singapore interest rates follow the US Fed. In Singapore's case MAS manages the exchange rate, so the pressure shows up in interest rates instead. In countries that let their currency float, interest rate gaps show up directly in the exchange rate.
Currencies are also bought and sold to pay for goods and services. A country that exports far more than it imports earns a steady stream of foreign currency that its exporters convert back home, which supports its own currency. A country that imports much more than it exports needs a steady supply of foreign currency, which weighs on its own.
Growth matters because a fast-growing economy draws investment from abroad: firms build factories there and fund managers buy its shares, and every one of them has to buy the local currency first.
Inflation works the other way. If prices in one country rise much faster than in another for years, its currency tends to lose value against the other, because each unit buys less at home. Over long periods this is one of the steadiest forces in currency markets. Over months, it is often swamped by the others.
In calm times, investors spread money around the world. When something frightening happens, such as a financial crisis, a war or a sudden market crash, many pull back to what they see as safe. The US dollar is the main beneficiary, because US government bonds are the world's largest and most easily traded safe asset, and much of the world's trade and debt is priced in dollars. The Swiss franc and, at times, the yen have also been treated as safe.
So in a crisis, the US dollar often rises against most currencies, including the Singapore dollar, even if the crisis started in the US. This is one reason currency moves are so hard to predict: they can be driven by fear as much as by economics.
The Singapore dollar has one feature that sets it apart. As you saw in module 1, MAS manages it against a trade-weighted basket of currencies and keeps the S$NEER inside a policy band.
That means the Singapore dollar is steady against the basket as a whole. It is not held steady against any single currency. If the yen falls sharply against most currencies, it falls against the Singapore dollar too, and MAS does not step in to prevent that, because the yen is only one part of the basket. The same goes for the ringgit, the euro or the Australian dollar.
So your experience depends on which currency you spend in. For Siti, the move that mattered was the yen alone, which can swing far more against the Singapore dollar than the basket ever does.
To compare exchange rates over time, write each one the same way, as Singapore dollars for a fixed amount of foreign currency, and work out the percentage change between them.
Here is an example with made-up rates. If 100 yen cost S$0.95 a year ago and costs S$0.90 today, the change is 0.90 divided by 0.95, minus one, which is about minus 5.3%. The yen has fallen about 5.3% against the Singapore dollar, so everything Siti buys in Japan costs about 5.3% fewer Singapore dollars than a year ago, before any change in Japanese prices.
Watch the direction. If the number of Singapore dollars needed goes down, the foreign currency has weakened and your spending there is cheaper. If it goes up, the foreign currency has strengthened and your spending is dearer.
Most bank apps and currency sites show a one-year chart. Pick the currency you spend in most often and see which way it has moved, and by how much.
Pick one currency you spend in often and note how much it has moved against the Singapore dollar over the past year.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).