USD - Where is it going?

The USD has been on a depreciating trend since the start of this year, with a 10.70% decline in the dollar index (DXY). Let's have a quick look at why and the potential outlook.

DXY: The dollar index is a measure of the value of USD relative to a basket of foreign currencies, including EUR, CHF, JPY, CAD, GBP and SEK - the 6 most significant trading partners of the US. It has a base of 100, meaning an index of 120 and 80 would mean a 20% increase and decrease in the USD strength relative to the other currencies, respectively.

Basic principles: Fluctuations in the strength of a currency are determined by demand and supply of that currency relative to the other currencies. The higher the demand for a currency, the higher its "price" - the stronger the currency. Note that the strength of a currency is always relative to another.

• Demand is affected by factors including interest rates, exports, political stability, safe-haven status for USD - all of which determine whether individuals/investors purchase more USD. 
• Supply is affected by monetary and fiscal policies, foreign investments, and imports.

Quick background; DXY climbed from ~100 to ~110 from October 2024 to January 2025 as Trump won the US election. The appreciation of the USD was primarily due to market expectations of the policies he advocated for and proposed. These include tax cuts (higher profits, investment), increased government spending (driving demand), and tariffs (trade balance).

Looking at key factors affecting currency value:

1. Demand side
1. Economic performance: Better-performing economies tend to have stronger currencies, due to continued growth, positive trade balance, high GDP growth and foreign investments etc.
2. Interest rate: A country with higher interest rate tends to appreciate relative to a country with lower interest rate as higher rates attract foreign investment and provides better returns. 
3. Inflation: A country with high inflation erodes the purchasing power of the currency, thus less attractive to investors and depreciate relative to other currencies.
4. Government debt: High levels of government debt erodes investor confidence in a country's financial stability and its ability to repay its debts and ultimately depreciate the currency value.
   
   
2. Supply side
1. Monetary policy: Central banks regulate the money supply in the economy via open market operations (i.e. buying/selling of government securities). Lower supply of money in the economy would drive up interest rates and hence the currency would appreciate.

These factors are closely intertwined as currency strength is affected by just about anything - it is the most "macro" security in the market. 

So why has the USD fallen YTD?

1. Interest rates: Inflation and rate cuts have been the hottest topic in the market in recent years post-Covid. Fed has started to lower its interest rates in 2024 as prices stabilise, thus making dollar-denominated assets less atractive compared to those in other countries with higher rates.
   
   
2. Gloomy geopolitical and economic outlook: Economic slowdown has been the norm around the world. Additionally, with the Trump tariffs that was launched earlier this year, trade outlook has worsened for US and the global economy. Coupled with the wars happening now, this then deters foreign investments.
   
   
3. Political uncertainty: The expected increase in government debt due to the Trump administration's policies also erodes investor confidence in the US economy. This led to Moody's' downgrade of its credit rating from Aaa to Aa1, the last triple-A credit score from a major international ratings firm. This does not bode well given that interest on government debt rises with a lower credit score. With debt of USD36tn, investors are calling it the "debt death spiral".
   
   
4. De-dollarisation: This decoupling of the USD is intertwined with all the above. USD as a reserve currency has lost some of its dominance as other countries like China, Russia and India have started to reduce reliance on the USD. This is a significant push in the depreciation of the dollar.

The outlook for the dollar does not look bright. What could reverse this downward trend?

1. Interest rates: Rates must rise again for USD to appreciate. This depends greatly on:
1. The Fed chairman who makes decisions on the rates. Powell's term comes to an end in May 2026, following which, Trump would then be able to nominate the next chair. Trump is currently pressuring Powell to cut rates to spur business, and despite the need for independence of the central bank, we may see the next Chair be more willing to cut rates which will cause further depreciation of the USD.
   
2. Inflation has been hovering at 2-3% for almost 12 months now, but Powell would like to see more data before deciding to cut rates. With the recent tariffs and oil price spikes, we may see a persistent inflation, thus delaying any rate cuts for now. 
   
   
2. Gloomy geopolitical and economic outlook: USD has typically been seen as a safe haven for investors in times of uncertainty. With the escalation of conflict in the Middle East today, however, we have not seen that flight to the USD. Instead, oil and gold surged 7% and 1.5% respectively. Other currencies viewed as safe havens have also appreciated, including CHF, JPY  and SGD. 
   
   
3. Political uncertainty: The US government needs to address its growing national debt and inconsistent stance on its policies to regain investor and consumer confidence. 

In my opinion, it seems likely that the USD will continue sliding as long as current events continue and Trump retains his usual approach to geopolitics and the economy. Upsides to the USD are there but possibility seems to be muted. Let's see where the dollar goes in H2 2025.

2nd July 2025: DXY is at 96.934.

DCM - An overview

Debt capital markets (DCM) is the team within the investment bank that helps clients raise funds via the issuance of bonds. DCM teams assist and advise these issuers in structuring, pricing and executing bond offerings. In their day-to-day, DCM bankers engage with clients (issuers) to understand their needs to better advise them on their capital structure and strategies. 

To supplement their engagement with issuers, DCM bankers also need to understand the other side of the coin: investor appetite - i.e. who are the ones that will provide capital in exchange for these newly issued debt?

Key aspects of the role:

• Facilitate primary issuance on both the investor and issuer side. 
• Conduct soft sounding in the market to understand demand and pricing expectations.
• Conduct/attend roadshows and other events to present the investment opportunity directly to institutional investors. Platform for Q&A.

DCM makes money in two main ways: 

1. Underwriting fees is the primary revenue stream, typically a percentage of the total amount of debt issued. Fees also depend on the complexity of the deal and the issuer's creditworthiness.
2. Advisory fees relate to advisory services on capital structure, debt management and optimising capital structure.

In a large bond issuance, a group of banks collaborate to underwrite the entire amount. This allows them to pool resources and share the risk. Key roles of the banks in these groups are:

1. Lead Bookrunner / Global Coordinator: Most important bank(s) - the primary advisors to the issuer and takes the lead in all aspects of the transaction. These banks "run" the book, collecting and managing investor orders. They lead the pricing decisions, manage the syndicate and take the largest share of underwriting. Naturally, fees are the highest.
2. Joint Bookrunner / Coordinator: Actively participate in all aspects of the deal alongside other joint bookrunners, including marketing, structuring, book-building and pricing.
3. Passive Bookrunner: Does not issue the bond or have access to the investor order book.

Additionally, bond issuances are supported by credit rating agencies like S&P and Fitch to provide public ratings for the bond.

Project bond is a type of bond issued to finance a specific project, just like a project finance loan used to finance a project. Characteristics are similar (e.g. non-recourse and payment relies on cash flows from the project). The key advantage for banks to help issue project bonds is to refinance existing bank loans with stable cash flows, freeing up capital for other uses. The advantage for the borrower/issuer is that project bonds allow for longer tenors, fixed pricing and lighter covenants, among other benefits.

LBO - An overview

Leveraged buyout (LBO) is the acquisition of a company (buyout) by a fund (the sponsor), in which a significant portion is financed through borrowing (leverage). In most banks (the lenders), this refers to the leverage finance or LevFin team. The key distinction in using more debt to buyout a significant portion of the company is that it allows for (1) lower upfront capital and (2) amplification of returns on equity. Other benefits include tax shield from debt. 

In summary, sponsors use significant debt to maximise equity and amplify returns to acquire companies which they think have the potential to grow and generate value for stakeholders. The success of an LBO depends on:

1. Target management's ability to implement a sound and long-term strategy
2. Evolution of the industry
3. The target's intrinsic value - qualities, products, services, brand etc.
4. Value creation especially with the sponsors' expertise and ability to support the target management team. E.g. providing access to its network, sharing best practices and expertise.

LBO is a 3-step process: acquire, monitor and exit. The monitoring phase typically lasts 4-5 years and is key as it is where value is created via:

1. EBITDA growth: increasing organic sales and margin improvement
2. Cash generation / deleveraging: reduces cost of capital, optimise capex
3. Strategic value / valuation multiple: growth profile, financial markets conditions at exit

There are several ways a fund can exit its LBO investments:

1. Trade sale: full disposal at price premium
2. IPO
3. New LBO (secondary, tertiary): for newcomer to join as minority or non-controlling shareholder
4. Continuation fund: another fund set-up by the sponsor to continue supporting the investment over the long-term

How banks come in: Levfin teams in banks support the sponsor via the provision of debt at the holdco level. The debt is then repaid via cashflows from the target company (opco). Banks could also provide advisory services for sponsors and target companies on the LBO transaction, including valuation, deal structuring, negotiation and syndication.

M&A - An overview

Mergers & acquisitions is the act of merging or acquiring a company by another company. Before diving in, let us consider what sell side is vs buy side, which is an important jargon to know. 

Buy side are firms that buy and manage securities to generate returns for their clients (investors). These include asset management firms, sovereign wealth funds and pension funds. Their goal is to provide risk-adjusted returns to their clients and generate management and/or performance fees. The role of the buy side in M&A is to:

• As money managers, buy side oversees the clients' money
• Determine whether to buy, sell or hold various investments to earn the returns for their clients
• They do this by conducting due diligence, e.g. internal research on opportunities, financial modeling and valuation
• Ultimately to increase wealth (assets under management)

Sell side are firms that sell or facilitate the sale to the buy side, a.k.a. the dealmakers. These include investment banks, brokerages and research houses. Their goal is to generate revenue through commissions/fees and spreads. The role of the sell side is to:

• Facilitate the increase of debt and equity (capital raising), and generate liquidity for securities
• Advise clients on major transactions and M&A
• Provide equity research analysis, perform financial modeling and valuation

Generic and brief M&A process:

1. Strategic planning of the business
2. Research on the target to be acquired
3. Due diligence based on available information (financial, tax, commercial, tech, legal etc.)
4. Contact the target and establish NDA
5. Generate internal business valuation
6. If keen, submit a letter of intent and conduct more in-depth due diligence before arriving at final valuation of the target
7. Negotiations begin and to consider sources of financing the transaction
8. Legal docs must be ironed out
9. Establish purchase price
10. Acquire and integrate

How banks make money from M&A

1. Advisory - banks can come in as an advisor to both the buy and sell side. Key aspects include in-depth understanding of the market and the target, to understand how the acquisition can generate value for the company. Banks earn retainer (fixed and recurring) + success (largest component, paid only upon successful closing of the transaction) fees from the transaction.
2. Financing - typically called leveraged finance in investment banks, the M&A financing team provides loans to the buyer. 

Trade Finance - An overview

The essence of trade finance lies in facilitating trade between counterparties (importers and exporters) while mitigating its risks, including non-payments (defaults), non-deliveries, etc. To put it simply, exporters (sellers) want to sell goods to importers (buyers) who can pay. Importers, on the other hand, want to purchase goods from sellers that can produce the goods to the specifications as listed in the contract. These needs are resolved through various trade finance products: 

1) Letters of credit ("LCs") - among the most common and standardised forms of trade finance. A bank guarantees payment to the exporter on behalf of the importer if the exporter meets the contractual terms and presents the required shipping documents (e.g. bill of lading). This reduces payment risk to the exporter. 

• Commercial LC (documentary credit) is the most common type, used for direct payment against shipment of goods.
• Standby LC (SBLC) acts as a guarantee and drawn only if the applicant (importer) defaults on their contractual obligations.
• Confirmation LC is when an additional bank (confirming bank) adds its own guarantee to the issuing bank's undertaking as another layer of security.
• Transferable LC is one that allows the beneficiary to transfer all or part of the LC to another one/multiple beneficiaries (e.g. middleman to end suppliers). 
• Back-to-back LC involves 2 LCs where a master LC acts as security for the issuance of a second LC
• Red clause LC allows the exporter to receive advanee payment from the advising bank before shipment of goods.
• Sight LC is where payment is made upon presentation of compliant documents.
• Usance LC is where payment is made at a specified future date after presenting the documents.

2) Documentary collection - also a common form of trade finance. Banks act as intermediaries to facilitate the exchange of documents. 

• Documents against payment is where the importer receives the shipping documents only upon making payment to the exporter's bank.
• Documents against acceptance is where the importer receives the shipping documents upon accepting a bill of exchange and will pay at a future specified date.

3) Factoring - simply put, it is the sale of a company's receivables in exchange for cash on a discounted basis.

4) Bank guarantee is where a bank promises to pay a beneficiary a specified sum in the event of non-fulfillment of contractual obligations. 

• Performance guarantee is where the bank guarantees a counterparty will fulfil their contractual obligations.
• Advance payment guarantee is where if an advance payment is not utilised as per the contract, the advance will be returned.
• Bid bond guarantee ensures a bidder will sign the contract if their bid is accepted.
• Payment guarantee is for payment for goods and services.

Funded trade finance: Involving direct cash advance or loan to a counterparty in the transaction, e.g. in receivables financing (factoring) and red clause LC.

Unfunded trade finance: Do not involve immediate cash outlay, but provides a commitment / guarantee against risks to facilitate the trade.

Key considerations in pricing a trade finance product:

1) Applicant's credit worthiness and country risk

2) Type of instrument

3) Notional value

4) Tenor

5) Relationship with the client

6) Complexity

How banks make money from trade finance:

1) Fees from BGs and LCs

2) Interest income from loans, e.g. import/export loans to purchase or produce goods

Cash Management - An overview

Cash management is a corporate banking product that revolves around the business of cash. Cash management teams provide solutions to corporates to help otimise their cash flow and liquidity. They do this via different ways:

1) Account management

2) Payments and collections

3) Liquidity management for excess cash, e.g. investment of surplus funds

4) Cash flow forecasting and optimisation

Benefits for corporates: 

1) Proactive decision-making supported by having a real-time, consolidated view of the company/group's cash across all their accounts.

2) Reduced borrowing costs by understanding their cash cycle and when cash is required to bridge any working capital gaps.

3) Additional revenue via interest income for surplus cash.

How banks make money through cash management:

1) Service fees - includes account maintenance fees and transaction fees.

2) Cash deposits from these companies are used to fund the bank's lending activities which generate income, greater than the interest it pays on these deposits. 

3) Some other ways include interbank lending (e.g. overnight loans) which generate interest. Such overnight rates are typically higher than the interest it pays on these deposits due to the difference in risk levels. The difference is what the bank profits on these transactions.

Investing in S-REITs - An overview

REITs are an extremely popular investment choice in Singapore, with the country being the largest REIT market in Asia (ex-Japan). As of February 2025, the 39 Singapore REITs (S-REITs) and property trusts have a total market cap of S$82bn, making up 10% of the Singapore Exchange's market cap. In a small country like Singapore, it is no surprise that more than 90% of S-REITs own properties outside Singapore. S-REITs are well-diversified across various sub-sectors, including industrial, retail, office, hospitality, data center and healthcare.

Fun fact: S-REITs that own Singapore real estate properties must distribute at least 90% of their specified taxable income to unitholders to qualify for tax transparency treatment. With quarterly/semi-annual dividends and no dividend tax in Singapore, S-REITs are thus a great sector in which to invest.

Structural overview of REITs: REITs pool funds from investors through an IPO, whose units are then offered to the public. The pooled funds are used to acquire and manage a portfolio of income-generating properties and leased out to tenants. The rental income is distributed back to investors via dividends. REITs are managed by the REIT manager which sets and executes the strategic direction of the REIT, charging a management fee (base + performance).

Steps to analysing REITs:

1) Understanding the REIT's business and portfolio - REIT type, sector focus, property portfolio quality and diversification

- sector risks and opportunities

- alignment with investment goals and risk tolerance

- quality of assets (e.g. prime location), geographic diversification, tenant mix, occupancy rate, weighted average lease expiry, rental reversion

2) Financial health and performance - key financial metrics, dividend analysis, and debt/leverage

- funds from operations, net asset value, net property income, property yield

- dividend per unit, dividend yield, payout ratio, dividend growth track record

- gearing (S-REITs have leverage limit of 50%)

- interest coverage ratio, credit rating, debt expiry profile

3) Management team

- track record, sponsor and fee structure

4) Macroeconomic and market factors

- interest rate (borrowing cost)

- economic conditions, regulatory environment, trends

5) Risk

- taxes, refinancing risk, leverage risk, concentration risk etc.