Singaporeans flock to foreign currency to lock in top interest rates

SINGAPOREANS are increasingly turning to foreign currency investments to take advantage of the strong local currency and protect their cash from inflation.

Their investment tool of choice is the humble foreign currency fixed deposit. The product is seeing a surge in popularity in the city-state as banks try to attract investor cash by offering bumper interest rates of as high as 5 per cent, which compares with about 3 per cent to 4 per cent on a normal fixed term deposit.

The US dollar has emerged as the preferred currency to invest in, contributing to the majority of foreign currency inflows among major banks. 

The appeal of the product – offered by banks for investors to buy and hold foreign currencies for a fixed term in return for interest – led to foreign currency deposits rising 13 per cent year on year in December to S$936 billion, accounting for 55 per cent of total deposits in the country, the latest data from the Monetary Authority of Singapore showed. 

Bloomberg Intelligence analyst Sarah Jane Mahmud expects demand for foreign currency deposits to persist this year as the Singapore dollar holds steady, making it relatively cheaper to buy other currencies. 

“Depositors are still likely to want to take advantage of favourable exchange rates to convert Singapore dollars into foreign currencies, with higher fixed deposit rates,” she said. 

The Singapore dollar has outperformed nearly all Group-of-10 currencies so far this year, gaining by around 1.1 per cent against the greenback and 0.8 per cent against the pound. The JPMorgan Global FX Volatility Index, which tracks three-month option volatilities, has been steadily declining from the 30-month highs seen in September last year – signalling a more supportive environment for foreign exchange investments. 

Still, US dollar fixed deposits work against investors if the Singapore dollar continues to strengthen against the greenback. Forward contracts point towards expectations for a stronger Singapore dollar versus the greenback over the near-term, with 12-month forward pricing at 1.3092 on Friday (Feb 10).

Singapore’s second largest lender Oversea-Chinese Banking and Standard Chartered currently offer the highest rate of 5.08 per cent on some US dollar fixed deposits.

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Strong demand

Communications consultant Justin Teh said US dollar fixed deposits are attractive at this point with guaranteed returns and higher yields than Singapore dollar placements. 

“While currency fluctuations could be a concern, the US dollar is considered a safe haven currency and should remain competitive against other currencies,” he said. “I don’t mind taking this risk for the higher yields as this already applies to my existing US equity investments.”  

OCBC’s head of deposits Na Kok Peng said foreign currency term deposits have grown more than threefold from a year ago, with US dollar placements accounting for 75 per cent of the total amount. 

“As interest rates are expected to remain high through the first half of 2023, we expect customer demand for time deposits to remain strong,” Na said.

UOB’s foreign currency fixed deposit portfolio recorded its highest growth in the past decade – rising more than 150 per cent last year – with US dollar deposits making up over 80 per cent of the portfolio. DBS, the nation’s largest bank, saw a tenfold increase in the second half of 2022, while HSBC’s portfolio grew 40 per cent over the same period.

Jacquelyn Tan, UOB’s head of group personal financial services, said it’s important to be mindful of exchange rate exposures when converting Singapore dollar assets in or out of placements, as price fluctuations of the foreign currency will impact the real value of returns.

Certified financial planner Lee Song Yong also warned that unless an investor had a need for US dollars, there was no need to chase the yield by taking on the forex risk.

“The reversal of the interest rates hikes could potentially devalue the US dollar, negating the additional spread to convert Singapore dollars to US dollars,” Lee said. BLOOMBERG