USD vs SGD: Is Currency Hedging Worth the Cost for Long-Term Capital Growth?

The price of certainty in an uncertain market – and whether it is worth paying  

Keith Leung

Managing Director & co-Head of Investor Relations

The idea of US Dollars (USD) and Singapore Dollars (SGD) reaching parity may have once seemed unrealistic, but has become increasingly plausible in recent times, supported by shifting economic fundamentals on both sides. Notably, a report published by DBS Bank Ltd suggested that USD/SGD could hit parity by 2040 — a striking USD vs SGD forecast given that it currently trades around 1.28 (as of the date of 3rd July 2026), prompting investors to think twice about investing in USD-denominated assets. This USD vs SGD trend has continued to gain traction in recent commentary, which cited SGD’s resilience during the Iran war as further evidence of its safe-haven properties. For many, parity is now not a matter of if, but when.

While SGD has indeed hit recent highs against USD, it has not yet breached historical or even 20-year highs. USD/SGD traded at similar levels from 2011-2014, but the prolonged period of SGD weakness in the years that followed makes the current strength seem anomalous in comparison. 

What is currency hedging?

Currency hedging is a technique used to reduce the impact of exchange rate movements on foreign currency-denominated investments. The overall return of such investments in local currency terms depends on two factors: asset performance and exchange rate. Common currency hedging methods include forward contracts and currency swaps, both of which n exchanging a set amount of currency at a predetermined forward rate on a specified future date.  

How hedging costs compare to realised SGD appreciation  

DBS’s projection implies an annual SGD growth rate of 1.66%-1.77% (depending on whether parity is assumed to be achieved at the start or end of year 2040). The question is thus whether a Singapore-based investor should hedge currency depreciation risk when investing in USD-denominated assets, and what would be the cost of such actions.  

Forward rates are mathematically determined based on interest rate differentials, not structural drivers of currency strength or weakness. Based on the latest USD/SGD forward rates, the implied 1-year SGD appreciation against the USD (i.e. the implied carry cost) is 2.55% [2], which exceeds the average SGD growth rate expected in the DBS paper. Longer hedges are not much cheaper — 3-year and 5-year forwards are priced at 871 bips and 1310 bips, which translate into annualised hedging costs of 2.26% and 2.04%, still surpassing the upper bound of the expected annualised SGD appreciation based on the DBS paper. In a nutshell: Hedging is expensive — the market charges more than what the fundamentals suggest the hedge is worth.

For investors, the issue is not simply the probability of SGD reaching parity in 2040, but the path-dependent effectiveness of a hedge. The annualised SGD growth rate is a calculation that assumes consistent yearly gains. However, multi-year currency movements are never linear in practice. Since 1981, year-on-year SGD fluctuations have ranged from -17.68% to +10.94%. This creates uncertainty around whether SGD’s recent momentum will persist, and if so, for how long. If USD/SGD instead enters a period of stagnation, investors who bought a hedge would have effectively paid for much more than its worth because the actual SGD appreciation is less than what the hedge was priced to protect against. Hedging costs are certain, but the benefits are not.  

A comparison of hedged vs unhedged funds

For readers less familiar with the terms, the distinction is simple: an unhedged fund leaves an investor fully exposed to movements between the fund’s currency and their own, while a hedged fund uses derivatives to strip most of that currency effect out. One accepts exchange-rate risk as the price of market access; the other pays to remove it.  

Some fund managers offer both unhedged and hedged share classes, where derivatives are used in the latter to minimise currency exposure from the underlying assets. A hedged and unhedged share class will report different performance figures for the same underlying fund.  In most cases, over an extended period of time, an unhedged USD share class will generally report better performance than the hedged SGD share class because of the implied carry cost. This cost is ultimately passed from the fund manager to the investor in the form of performance drag.  

A possible misconception is that an unhedged USD share class outperforms a hedged SGD share class because it compensates investors for bearing FX risk. The more accurate framing is actually the reverse: the unhedged return is the true baseline, while it is the hedged share class that suffers from carry costs eroding the same base return. For a Singapore-based investor, choosing the unhedged share class is not a speculation on USD/SGD with the aim of earning a currency risk premium, but rather accepting the volatility as an inherent feature of accessing the US market.

The costs of investing in a hedged share class go beyond just the implied carry cost. Even if investors accept it, there are additional operational costs incurred by the fund manager to maintain the hedges that are eventually borne by investors. Such costs can be explicitly charged through higher management or hedging fees, or implicitly embedded in the net performance. Hedged share classes eliminate the need for investors to manage separate FX hedging instruments, but this convenience comes at a price.  

This is why Quantedge does not offer hedged share classes in SGD or any other currency. Despite being a Singapore-based fund manager, the fund itself is offered solely in USD as a deliberate choice to reflect the predominantly USD-denominated composition of our underlying assets and broader global investable universe.  

The opportunity cost of avoiding currency risk

Investing purely in SGD-denominated assets is an alternative that bypasses both the cost of hedging and uncertainty of currency movements altogether. This approach may be particularly suitable for investors with significant SGD liabilities. However, it presents two key challenges for investors.

First, the investment universe of SGD-denominated assets is dwarfed by that of USD-denominated assets. According to the Bank for International Settlements 2025 survey, the USD accounts for 88.4% of global FX transactions. In contrast, the SGD accounts for only 2.4%, reflecting the currency’s role in facilitating financial flows mainly in Singapore and the Southeast Asian region, which is a far cry from the USD’s status as a global reserve currency. Restricting a portfolio to purely SGD-denominated assets to avoid currency volatility thus comes at significant opportunity cost as investors forfeit participation in many potentially attractive markets, assets and securities that do not offer SGD equivalents. Such portfolios will also be significantly correlated to domestic economic variables, introducing greater concentration risk.

Second, SGD-denominated assets have historically delivered lower returns than USD-denominated, at least when comparing the S&P500 and STI, as a proxy or benchmark for USD- and SGD-denominated assets respectively. Since 1990, the Straits Times Index (STI) has underperformed the S&P 500 in most decades. The US has a long-standing history as the home to many best-in-class companies and innovation leaders, which serve as powerful growth engines, generating returns that have outpaced the cost of currency fluctuations. Assuming the continuation of S&P500’s historical annualised returns of approximately 10% up to 2040, an investor would achieve higher returns by investing in the S&P500 even if SGD appreciates against the USD by twice the rate projected by the DBS study.

Hedging costs as a risk premium

Currency hedging is generally expensive in the sense that hedging costs often exceed realised currency movements. Yet, hedging instruments remain in demand, for the same reason insurance products are: risk-aversion. Many investors are risk-averse, and are willing to pay a price (i.e. the insurance premium) to eliminate or mitigate the potential downside risk of unexpected financial shocks. At market equilibrium, this premium reflects the fair price required by the insurer to absorb that risk. However, insurers would typically price the protection at a rate that exceeds the fair price, to earn a profit on their insurance business. The same concept applies to USD/SGD hedging, where the implied carry cost functions the same way as insurance premium.

Over the long run, hedging tends to exert a drag on returns. However, corporations, such as manufacturers and commodity producers, continue to actively hedge their currency exposure for business reasons. Their primary objective is to generate profits from their manufacturing or production activity, and they need to eradicate or mitigate the risk of changes in currency exchange eroding their profits. For these entities, paying a premium to ensure currency stability is not an investment decision but a business cost to preserve margins and meet their financial obligations.

Currency risk in the Quantedge portfolio can be divided into two buckets. First, we run an FX book which, similar to the rest of the asset classes we invest in, include both risk premia strategies and long-short market neutral strategies. These FX holdings give us direct currency exposure across a range of global currencies, diversified in a manner which ensure that any sharp movement in any single currency will not have a material impact on the overall portfolio. Second, Quantedge carries indirect FX exposure as a byproduct of our investments in other asset classes, being equities, fixed income, commodities and reinsurance. This exposure is diversified across multiple currencies by virtue of our investments spanning an ultra-diversified array of markets. Within these non-FX strategies, we do not specifically take positions based on expected currency movements – currency views are expressed solely through the FX book. However, the associated currency risk of the non-FX book is not ignored; it is implicitly reflected in the risk metrics and signals that our models assess. For the reasons enumerated earlier, Quantedge does not adopt a suboptimal approach of explicitly hedging its USD/SGD currency risk, or any other specific currency risk, for that matter. This is not to say that currency risk should be downplayed or disregarded entirely — it is still a significant factor in the overall return potential of foreign currency-denominated investments. But where expected returns are sufficiently attractive even after accounting for currency volatility, accepting that volatility instead of paying to eliminate it is often the more rational and ultimately rewarding choice.

Sources

• Bank for International Settlements. (2025, September 25). OTC foreign exchange turnover in April 2025. https://www.bis.org/statistics/rpfx25_fx.htm

• DBS Bank. (2025, October 22). Singapore 2040: The next 15 years of quality and inclusive growth. DBS Insights Direct. https://www.dbs.com/insightsdirect/macro/library?portsec=-1&portid=43760

• Federal Reserve Bank of St. Louis. (2026, June 22). Singapore Dollars to U.S. Dollar Spot Exchange Rate. Federal Reserve Economic Data.  https://fred.stlouisfed.org/series/DEXSIUS

• FXEmpire. (n.d.). US Dollar / Singapore Dollar. https://www.fxempire.com/currencies/usd-sgd/forward-rates)

• Multpl. (n.d.). S&P 500 Historical Prices by Year. https://www.multpl.com/s-p-500-historical-prices/table/by-year  

• Stooq. (n.d.). Historical data: Straits Times Index - Singapore (^STI). https://stooq.com/q/d/?s=^sti&i=m&f=19700101&t=20260501&l=12

• TradingView. (n.d.). U.S. Dollar / Singapore Dollar. https://www.tradingview.com/symbols/USDSGD/

Notes

[1] As of the first trading day of the year.

[2] Spot and forward rates were as of the date June 16 2026.

[3] YoY SGD appreciation is calculated as the percentage change in the SGD/USD rate between the first trading days of consecutive years.

[4] Annualised returns are calculated as the compound annual growth rate between the opening values on the first trading day of the start year and first trading day of the year following period end.

This article is for general information and does not constitute investment advice.