Explain how a strong US dollar affects Asian markets and the SGD returns on your foreign holdings.
A sharp rise in the US dollar tightens borrowing across Asia and emerging markets, and their shares have usually lagged when it happens. For a Singapore-dollar investor, the same rise lifts the SGD value of US dollar holdings, so one part of the portfolio gains while another tends to lose.
The US dollar is the world's main currency for borrowing, trade and reserves, so large moves in it reach almost every other market. In 2022 it rose against almost every currency in the world.
Governments, banks and companies outside the US borrow heavily in US dollars because the deepest lending markets are there. A company in Thailand or Indonesia may earn in baht or rupiah but owe US$10 million, an example figure. When the dollar strengthens, servicing and repaying that loan costs more in local currency, even though the loan terms have not changed.
Borrowers respond by cutting spending and investment, and lenders become more cautious. A strong dollar works like a credit tightening for much of the world, on top of whatever local central banks do.
Dollar strength usually comes with higher US interest rates, and in 2022 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 have to choose between raising their own rates to defend the currency, which slows the economy, and letting the currency fall, which raises import prices.
In the early 1980s, very high US rates and a soaring dollar helped trigger the Latin American debt crisis, which 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 spread across much of Asia. In 2013 the Fed signalled it would slow its bond buying and money flowed quickly out of emerging markets, an episode known as the taper tantrum. In each case Asian and emerging market shares lagged while the dollar rose sharply. The reverse has also held: much of the 2000s saw a weak dollar and strong emerging market returns.
The pattern does not run on a schedule. The dollar can stay strong for years or turn within months, and many dollar rallies have passed without a crisis. History gives you a mechanism to watch for, and it cannot predict what happens next.
A rising US dollar pulls an SGD portfolio two ways. It raises the SGD value of anything priced in US dollars, even if the asset price does not move: if the US dollar rises 8% against the Singapore dollar, an example figure, a US holding with no price change gains 8% in SGD. This is the currency term from Lesson 1.3, Returns in Singapore dollars when the asset is priced in US dollars. It also tends to weigh on Asian assets, Singapore shares included, through the dollar debt burden, capital outflows and rate pressure.
Marcus, a Singapore-based investor, saw both through 2022. His Asian holdings and STI ETF had a poor year, while his US holdings, measured in SGD, fell less than their US dollar prices suggested. Both effects came from the strong dollar. The currency gain on US dollar holdings acts as a cushion in exactly the conditions that tend to hurt Singapore and Asian holdings.
MAS policy shapes how large this effect is. As Lesson 3.4 explained, MAS manages the Singapore dollar against a basket of currencies, so the Singapore dollar has often moved less against the US dollar than other Asian currencies have.
To estimate your own exposure, check each fund's factsheet for the share held in US dollar assets and multiply the fund value by that share. Add any US-priced holdings you own directly, and compare the total with your whole portfolio. Multiply the total by the percentage move in USD against SGD to estimate the SGD gain or loss before price changes.
Marcus's world ETF is worth about S$91,000, an invented figure, and its factsheet shows most of it in US companies. Assuming 65% is in US dollar assets gives about S$59,150. Adding his US chip designer holding at S$15,000 gives about S$74,150, a little over a third of his portfolio. An 8% rise in USD against SGD would add about S$5,900 to those holdings in SGD before any price changes, cushioning the US side while his Singapore and Asian holdings tend to suffer.
Marcus's broker screen shows USD/SGD, which 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, and avoid relying on USD/SGD alone.
The DXY index measures the dollar against six major currencies, and the euro makes up more than half of it, so it mostly reflects the dollar against Europe. The Federal Reserve's broad trade-weighted dollar index covers 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 it with a long history. Compare it with Asian equity performance over time.
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 note two periods when they moved apart.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).