You will be able to explain how US dollar strength affects Asian markets and your SGD returns on foreign holdings.
Through 2022 the US dollar rose against almost every currency in the world. Marcus noticed two things that seemed to contradict each other. His Asian holdings and his STI ETF were having a poor year. Yet his US holdings, measured in Singapore dollars, were falling less than their US dollar prices suggested. Both effects came from the same source. The dollar is the world's main currency for borrowing, trade and reserves, so when it moves a long way, it moves almost everything else.
Governments, banks and companies outside the US borrow heavily in US dollars, because that's where the deepest lending markets are. A company in Indonesia or Thailand might earn in its local currency and owe in dollars.
When the dollar strengthens, that debt gets heavier in local terms. A loan of US$10 million costs more baht or rupiah to service and repay, even though nothing about the loan changed. Borrowers cut spending and investment to keep up, and lenders become more cautious. A strong dollar works like a tightening of credit for much of the world, on top of whatever local central banks are doing.
Dollar strength usually comes with higher US interest rates, as it did in 2022 when the Fed raised rates quickly. Higher US rates pull money towards US assets, which pushes the dollar up further and drains capital from smaller markets. Some Asian central banks then face a choice between raising their own rates to defend their currencies, which slows their economies, or letting the currency fall, which raises import prices.
The pattern has repeated across decades. In the early 1980s, very high US interest rates and a soaring dollar helped trigger the Latin American debt crisis that began in 1982. In 1997, after a period of dollar strength, Thailand could no longer hold the baht's link to the dollar, and the crisis that followed spread across much of Asia. In 2013, when the Fed signalled it would slow its bond buying, money flowed out of emerging markets quickly in an episode that became known as the taper tantrum.
In each case, Asian and emerging market shares lagged when the dollar rose sharply. The reverse has also held: long stretches of dollar weakness, such as much of the 2000s, coincided with strong returns from emerging markets.
None of this is a schedule. The dollar can stay strong for years or turn within months, and plenty of dollar rallies have passed without a crisis. What the history gives you is a mechanism to watch for, not a prediction.
For you, a rising US dollar has two effects that pull in opposite directions.
It adds to the Singapore dollar value of anything priced in US dollars, even when its price doesn't move. If the US dollar rises 8% against the Singapore dollar, a US holding with no price change gains 8% in SGD, through the currency term in lesson 1.3, Returns in Singapore dollars when the asset is priced in US dollars.
At the same time it tends to weigh on Asian assets, including Singapore shares, through the channels above.
Here is Marcus's exposure, with made-up figures. His world ETF is worth about S$91,000, and its factsheet shows most of it in US companies. Say 65% is in US dollar assets, about S$59,150. Add his US chip designer at S$15,000, and he has about S$74,150 in US dollar assets, a little over a third of his portfolio. An 8% rise in the US dollar against the Singapore dollar would add about S$5,900 to those holdings in SGD before any price changes. That's a cushion for his US holdings in exactly the conditions that tend to hurt his Singapore and Asian ones.
MAS policy shapes the size of this effect. Because MAS manages the Singapore dollar against a basket, as lesson 3.4 explained, the Singapore dollar has often moved less against the US dollar than other Asian currencies did.
USD/SGD is the rate on Marcus's broker screen, but it mixes two stories: what the US dollar is doing and what the Singapore dollar is doing. To see the dollar cycle itself, use an index that measures the dollar against many currencies at once.
Two are widely used. The DXY index measures the dollar against six major currencies, and the euro makes up more than half of it, so it tells you mostly about the dollar against Europe. The Federal Reserve publishes a broad trade-weighted dollar index covering many more trading partners, including Asian ones, which makes it more useful for judging what dollar moves mean for Asia. FRED, the St. Louis Fed's database, carries the broad index with a long history.
For the activity, chart the Fed's broad dollar index against an Asia ex-Japan equity index over ten years. Look for the periods where one rose while the other fell, and the periods where they didn't follow the usual pattern.
Chart a trade-weighted dollar index against an Asia ex-Japan equity index over ten years and write down two periods where they diverged.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).