Singapore’s currency scales new heights as traders bet on diverging policy paths

The Singapore dollar has surged to levels not seen since 2014 as traders wager on a hawkish policy stance from the city state’s central bank

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A customer withdraws Singapore dollar banknotes from an ATM. The city state’s currency is the second-best performer in Asia this year behind Malaysia’s ringgit. Photo: AFP

Published: 11:44am, 26 Aug 2024

Singapore’s dollar advanced to its strongest in almost a decade as traders weighed the difference between the local monetary authority’s relatively hawkish policy outlook compared with that of the US Federal Reserve.

The local dollar hit levels last seen in 2014 against the US dollar late on Friday, and fluctuated around the 1.30 per dollar in early trading on Monday. Singapore’s currency has gained about 1.5 per cent this year, to be the second-best performer in Asia behind Malaysia’s ringgit.

Singapore’s central bank has sought to rein in inflation by maintaining an appreciating bias. Photo: Reuters

The Monetary Authority of Singapore, which uses the exchange rate as its main monetary policy tool, maintained an appreciating bias for the currency at its July meeting to rein in inflation. Singapore upgraded this year’s growth forecast last month to a range of between 2 per cent and 3 per cent, from an earlier band of 1 per cent to 3 per cent, citing a resilient external demand outlook, further underpinning the local dollar.

On the other hand the US dollar slumped after Fed Chair Jerome Powell all but confirmed in a speech that interest-rate cuts are coming to the US next month. He said the “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”

“Dollar-Singapore dollar continue to trade with a heavy bias as Powell’s speech at Jackson Hole gave markets greater conviction to sell dollars,” said Christopher Wong, a Singapore based FX strategist OCBC Bank Singapore.

However, further near-term gains for the Singapore dollar against the US dollar may be limited.

The Monetary Authority of Singapore focuses on the currency’s nominal effective exchange rate, referred to as S$NEER, which it allows to move within a policy band. OCBC’s Wong sees the S$NEER trading near the stronger side of its band, suggesting the Singapore dollar’s gains versus the US dollar may lag those of its peers.