This made it difficult for other countries to return to the gold standard, as their gold reserves had been depleted.
Thus, in 1944, delegates from 44 Allied countries gathered in Bretton Woods, New Hampshire, to establish a system for managing foreign exchange that would not disadvantage any nation.
After World War II ended in 1945, the Bretton Woods system effectively pegged major currencies to the US dollar, which was in turn backed by gold.
Even after the system collapsed in the 1970s, when the US suspended the convertibility of the greenback to gold, the dollar remained dominant, buoyed by the strength of the US economy, deep capital markets and the country’s political stability.
Today, the US dollar accounts for nearly 60 per cent of global foreign exchange reserves, according to the International Monetary Fund (IMF), and it is used in nearly 87 per cent of foreign exchange related transactions.
Much of the world’s oil and commodities are also priced and traded in dollars, cementing the greenback’s status as the so-called petrodollar.
SOFTENING GREENBACK HAS A “MIXED IMPACT”
As the US dollar continues to lose steam against major currencies, investors and policymakers around the globe are closely monitoring its potential to destabilise markets, shift trade balances, and reorder long-standing financial norms.
Mr Erik Wong, portfolio manager and head of FX at Lion Global Investors, an asset management arm of OCBC Bank, said in light of prolonged US-China trade tensions and rising protectionism, a softer US dollar has “a mixed impact” on Singapore’s economy.
The Singapore dollar tends to strengthen when the greenback weakens, and the former has outperformed most Asian currencies this year due to its safe-haven appeal, he noted.
As such, the Singdollar’s strength has eroded the price competitiveness of the Republic’s exports, especially against regional peers such as Malaysia and Vietnam. And so, leading export sectors such as electronics, logistics, and pharmaceuticals are feeling the pressure to reprice or shift production.
Ms Chia from DBS’s Global Financial Markets added that with the US dollar playing an integral role in trade invoicing and corporate funding worldwide, any significant volatility might stress institutions that have currency mismatches.
For instance, companies that earn revenue or hold assets in US dollars but have to repay loans in stronger currencies may find themselves exposed to financial losses as their dollar holdings lose value.
Mr Wong added: “A stronger SGD (Singapore dollar) helps moderate imported inflation, softening the impact of global food and energy price increases. With supply chains fragmenting, the overall effect depends on how quickly firms can adjust operations and reconfigure trade routes.”
Mr Cameron Systermans, head of multi asset at global consulting firm Mercer Asia, noted that a slumping US dollar usually benefits Asian and emerging markets, as investors will move their funds to these markets amid a weakening greenback.
“Although looking forward, this tailwind may be partially offset by the impact of higher US tariffs,” he added.
Trade aside, given Singapore’s substantial reserves and investments in US dollars, a weakening greenback naturally raises concerns about the potential impact on its national wealth.
As of March 31, 2024, the Official Foreign Reserves managed by the Monetary Authority of Singapore (MAS) was S$498 billion, and the size of state investor Temasek’s net portfolio value was S$389 billion. The size of the Government’s funds managed by GIC is not publicly published, but it has been reported that GIC manages well over US$100 billion (S$128.5 billion).
Mr Alex Low, the principal investment specialist at investment and wealth management company PhillipCapital, said that while currency translation effects can influence reported returns, especially on US dollar-denominated assets held by GIC and Temasek, their globally diversified portfolios and long-term investment horizons provide a natural hedge.
“These institutions typically adopt long-term strategies with risk-adjusted performance benchmarks,” Mr Low said, adding that their robust hedging frameworks and multi-asset allocation strategies help manage exposure to currency fluctuations effectively.
He noted that a weaker US dollar may also influence monetary policy calibration for MAS. Singapore lets its dollar move within a controlled range against a basket of key trading partner currencies, including the US dollar.
If the greenback stays weak for a long time, it could affect this balance, and that may lead Singapore’s central bank to tweak its currency policy.
“MAS has already responded with a gentler slope of SGD appreciation to strike a balance between controlling inflation and supporting export competitiveness,” Mr Low added.
