Diversification has been called the only free lunch in investing. Beyond diversifying across asset classes and sectors, geographic diversification is also important when it comes to managing investment risk and getting better returns. While investing beyond Singapore’s borders has its advantages, fluctuations in exchange rates can affect your portfolio – especially in the short term.

Why exchange rates fluctuate

Currencies are always fluctuating in price against one another as they are traded on the foreign exchange (forex) market. A currency’s forex value depends on a confluence of factors, including:

Central bank interest rates. The higher the interest rates paid by a country’s central bank, the more valuable the currency becomes. This attracts more foreign capital as investors will get a better return by holding assets in the country’s currency. The currency thus increases in value i.e. appreciates due to the rise in demand. Inflation. Countries with high inflation rates tend to