{"id":1125,"date":"2025-05-06T18:00:35","date_gmt":"2025-05-06T10:00:35","guid":{"rendered":"https:\/\/www.syfe.com\/magazine\/?p=1125"},"modified":"2025-05-07T17:33:53","modified_gmt":"2025-05-07T09:33:53","slug":"understanding-currency-impact","status":"publish","type":"post","link":"https:\/\/www.syfe.com\/magazine\/understanding-currency-impact\/","title":{"rendered":"Understanding Currency Impact"},"content":{"rendered":"\n
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Diversification has been called the only free lunch in investing. Beyond diversifying across asset classes and sectors, geographic diversification is also important when it comes to managing investment risk and getting better returns. While investing beyond Singapore\u2019s borders has its advantages, fluctuations in exchange rates can affect your portfolio \u2013 especially in the short term.<\/p>\n\n\n\n

So what should you know about currency impact, and how does it impact your portfolio?<\/p>\n\n\n\n

Why Exchange Rates Fluctuate<\/strong><\/h2>\n\n\n\n

Currencies are always fluctuating in price against one another as they are traded on the foreign exchange (forex) market. A currency\u2019s forex value depends on a confluence of factors, including:<\/p>\n\n\n\n

Central bank interest rates. <\/strong>Higher interest rates set by a country\u2019s central bank tend to increase that currency\u2019s value. Higher rates attract more foreign capital as investors will get a better return by holding assets in the country\u2019s currency. The currency thus tends to increase in value due to the rise in demand.\u00a0<\/p>\n\n\n\n

Economic growth. <\/strong>A country with strong economic growth and financial stability tends to attract more foreign capital. This increased demand for the country\u2019s assets can lead to a stronger currency. On the other hand, slower growth or rising uncertainties\u2014such as geopolitical tensions or global trade disruptions\u2014can put downward pressure on the country’s currency. <\/p>\n\n\n\n

Inflation. <\/strong>Countries with high inflation rates tend to have lower currency values. As the prices of goods and services increase at a faster rate relative to other countries, demand for the country\u2019s exports falls, bringing about less demand for the country\u2019s currency as well.<\/p>\n\n\n\n

Political stability<\/strong>. Political shifts can trigger swift currency movements. The UK\u2019s Brexit vote in 2016 is a classic example \u2013 the pound fell 20% before making a partial recovery. <\/p>\n\n\n\n

Currency Movements and Your Portfolio <\/strong><\/h2>\n\n\n\n

If you’re investing in ETFs, stocks, funds, bonds, or fixed deposits that are in USD (or any other foreign currency) while your base currency is SGD, you\u2019ll be exposed to currency impact. In simple terms, your returns may go up or down depending on exchange rate movements.<\/p>\n\n\n\n

You\u2019ll notice that your total profit or loss comprises two components:<\/p>\n\n\n\n

Portfolio impact<\/strong> \u2013 The change in value based on the performance of your investment assets.<\/p>\n\n\n\n

Currency impact<\/strong> \u2013 The change in value resulting from movements in exchange rates.<\/p>\n\n\n\n

Let\u2019s say your investment is in USD. If the USD strengthens against the SGD (i.e., the SGD weakens), your investment will deliver a higher return when converted back to Singapore dollars.<\/p>\n\n\n\n

Conversely, if the USD weakens against the SGD, your US-denominated investments will convert into fewer Singapore dollars, reducing your overall return.<\/p>\n\n\n\n

Example: How Currency Fluctuations Affect Your Returns<\/strong><\/h2>\n\n\n\n

Let\u2019s say you invest USD 10,000 in a US ETF.<\/p>\n\n\n\n