US dollar, energy and gold: What to know about currencies and commodities

UOB's Heng Koon How answers some of your key questions on currencies and commodities, including energy prices and gold

Person counting US dollar bills
The US dollar has strengthened against almost every other currency in the world, including the Singapore dollar. PHOTO: GETTY IMAGES

In July, the US Federal Reserve raised its benchmark borrowing rate by 75 basis points for the second consecutive month. This is the central bank’s latest move in taming inflation, which remains high at July’s annual rate of 8.5 per cent. How does this affect the Singapore dollar – and your life? And in uncertain times, is gold a good investment?

In this column, Mr Heng Koon How, head of Markets Strategy at the Global Economics and Markets Research team at UOB, answers some of your key questions on currencies and commodities. In his role, Mr Heng formulates forecasts and market views for foreign exchange, commodities and interest rates. He has more than 25 years of financial markets experience, covering a spectrum of key asset classes.

Q: Will the Singdollar strengthen or weaken, and why is the US dollar so strong now? How does this affect my daily life?

A: The outlook for the Singapore dollar depends on which foreign currency you are measuring it against.

The US dollar has indeed strengthened against almost every other currency in the world, including the Singdollar. This is because the US Federal Reserve has been taking aggressive action to fight inflation by hiking interest rates sharply. In general, rising interest rates tend to attract greater demand for a currency, which in turn increases its value. Our forecast is for the US dollar to continue rising modestly against the Singdollar through the end of this year from its current level of 1.40.

At the same time, the Monetary Authority of Singapore (MAS) has also introduced several rounds of monetary policy to support the Singdollar and tame inflation on our shores. Unlike many other central banks, MAS uses foreign exchange and not interest rates as its main policy tool.

Simply put, it buys and sells Singapore dollars to keep our currency within a predetermined band relative to those of our major trading partners. MAS’ recent policy moves should help the Singdollar remain strong against regional currencies such as the Malaysian ringgit, Indonesian rupiah, Thai baht and even the Chinese yuan and Japanese yen.

This can work to our advantage in different ways. Firstly, the relative strength of the Singdollar serves as a buffer for the returns of our investments that are denominated in Singapore dollars.

Beyond that, what most of us may notice is our purchasing power becoming stronger when we travel or spend abroad. For example, S$1 is now worth more than 100 yen, which was unimaginable just a year ago when S$1 was worth around 85 yen.

Q: Will energy prices continue to rise? How will this affect me, besides having to pay more for utilities and for refuelling my car?

A: You are probably aware that energy prices have been rather volatile this year. On one hand, growing fears of a recession have been weighing on crude oil prices, as global energy demand weakens when the economy slows down. On the other hand, geopolitical risks – particularly the protracted Russia-Ukraine conflict – have kept energy costs elevated. For example, the disruption of Russian gas to Europe has caused natural gas prices to skyrocket, especially as the continent approaches winter.

Our view is that crude oil prices, which are currently hovering above US$90 (S$126) per barrel, could well climb to the US$110 or US$120 mark in the months to come.

However, these global events are mostly out of our control. It would be wise for us to simply budget carefully for our utilities bills and not expect pump prices to return to previous levels so soon.

This could also be a good time to explore environment-friendly solutions, such as switching to an electric vehicle or solar power for your home. There are loan options such as the UOB Go Green Car Loan and Home Loan that can help you save money even as you do your part for the environment.

Q: Is this a good time to invest in gold?

A: Gold is useful to hold, because it has historically proven its value as a safe-haven asset. In times of turmoil, such as during market crashes and geopolitical crises, it tends to hold its value or even appreciate while other asset classes like stocks and bonds may be tumbling.

Many pension funds and hedge funds hold a small percentage of their assets in gold to lower their portfolio volatility. Central banks across the world also hold physical gold bars as part of their long-term reserves.

On the flip side, gold is sensitive to interest rate fluctuations. It does not generate interest, so rising rates may cause investors to gravitate towards other interest-yielding asset classes, which then weighs on gold prices. This explains why gold has fallen from its peak of around US$2,000 per ounce in March to around US$1,700 lately.

Nonetheless, with the growing uncertainty surrounding global economic growth and rising geopolitical risk in both Asia and Europe, our view is that gold has an important role to play in your investment portfolio.

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