Weak US dollar lowers net returns on investments, says Temasek chief

[SINGAPORE] The US dollar’s recent weakness against major currencies such as the euro and Singapore dollar has pushed hedging costs sharply higher.

It has now reached a point where the cost of hedging “is becoming too much”, said Dilhan Pillay, executive director and chief executive officer of Temasek Holdings.

“The cost of hedging has now gone up, because I find that everybody’s hedging,” said Pillay. “It’s come to a point now where the cost of my hedges is becoming too much.”

As a result, some US dollar-denominated assets “will not give me a net return that will justify my allocation of capital there”, he said.

Still, rotating out of the US equities market is not straightforward, he added.

Pillay cited the decade between 2002 and 2012 as an example. During that period, Singaporeans who bought US equities – specifically in the S&P 500 – would have recorded losses of 15 per cent after converting their returns to Singapore dollars, even though the benchmark index posted returns in US dollar terms.

He was speaking on Wednesday (Nov 19) at a panel during the Bloomberg New Economy Forum held at Capella Singapore in Sentosa.

Also on the panel were Davide Serra, founder and CEO of Algebris Investments, and Philippe Setbon, CEO of Natixis Investment Managers. The discussion was moderated by Erik Schatzker, editorial director of Bloomberg New Economy.

So far in 2025, the greenback has retreated 4.2 per cent against the Singapore dollar and 10.2 per cent against the euro. As at Mar 31, about 24 per cent of Temasek’s S$434 billion portfolio was exposed to US dollar-denominated assets.

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Hedging helps investors protect the value of foreign-currency assets by locking in exchange rates. But when a currency weakens sharply, hedging becomes more expensive because counterparties demand higher premiums to take on the risk.

“Weakness in the US dollar to a non-US dollar denominated investor is a big issue, and that, I think, will have an impact within the capital markets, both public and private,” Pillay said.

Yet shifting capital out of the US presents its own difficulties. While there are “promising” equity markets such as India, China and Europe, Pillay said the “absorption capacity is not there” for capital of Temasek’s scale.

Alternative asset classes – including fixed income and commodities – are options, but Temasek is not an investor in either space.

Infrastructure, particularly core-plus infrastructure – which typically refers to stable, income-generating assets – is another area that offers yields and total returns uncorrelated to equity markets.

“But the fact is that for all these awesome asset classes, it’s all denominated in US dollars, right? So the rotation that you have to think about is very complex,” Pillay said.

“Now, it might be that the structural issues we face in the United States are issues that have to be thought about in your risk analysis, but the rotation is not easy, and that’s the reality,” he added.