The Singapore insurance and asset management industry has steadily increased its exposure to US dollar (USD) denominated assets over the past decade, driven by structural factors, including a limited domestic investment universe of long-dated Singapore dollar (SGD) fixed income securities and the pursuit of enhanced yields. Direct overseas investment into North American markets by Singaporean financial institutions has risen significantly to SGD 45 billion in 2024, up from SGD 6.5 billion in 2015, according to the Singapore Department of Statistics. That represents a seven-fold increase over nine years. However, a significant structural shift in the USD/SGD interest rate differential over the past five years has materially altered the economics of foreign exchange (FX) hedging. While FX forwards continue to offer operational simplicity, flexibility, and deep market liquidity, the increasing cost of hedging, driven by wider interest rate differentials and increasingly negative forward points, has prompted market participants to re-evaluate traditional currency risk management approaches. This paper examines the key drivers behind these developments, the implications for hedging costs and the range of alternative strategies being considered by institutional investors.
Discussion points:
- The structural case for USD exposure: Limited domestic investment universe, the advantage of US dollar assets, and Singapore’s investment abroad to North America.
- The FX hedging demand surge and forward market: Why forwards dominate over cross-currency swaps.
- The cost problem: How the interest rate differential directly impacts FX forward points.
- The hedging dilemma and market response: Four types of emerging alternatives.