The Singapore dollar has recently surged to its strongest level since 2014, trading around 1.30 per US dollar. This marks a significant gain of about 1.5% this year, making it the second-best performer in Asia after Malaysia’s ringgit [41890aa5]. The impressive performance is largely attributed to the hawkish monetary policy stance maintained by the Monetary Authority of Singapore (MAS) during its July meeting, aimed at combating inflation [41890aa5]. The MAS has kept its monetary policy settings unchanged for a fourth straight time, maintaining the slope, width, and center of the currency band to support the local dollar's appreciation [2cca61e8].
However, analysts caution that the Singapore dollar may face potential weakening in the coming months. It has already dipped from 1.337 at the start of August and 1.358 in early July [b03c6338]. Analysts, including Mr. Sim Moh Siong from Bank of Singapore, suggest that if the US economy avoids recession, the US dollar may recover, which could further pressure the Singapore dollar [8f6c3a12]. Expectations of 100 basis points of rate cuts by the US Federal Reserve this year could contribute to this trend, as the US dollar weakens in response to a resilient US economy avoiding recession [b03c6338]. UOB has also indicated a modest easing of Singapore dollar appreciation anticipated in October [b03c6338].
In light of resilient external demand, Singapore's growth forecast has been upgraded to between 2-3% from the previous estimate of 1-3% [41890aa5]. This positive economic outlook contrasts with the US Federal Reserve's indications of likely interest-rate cuts, which have contributed to a slump in the US dollar [41890aa5]. The MAS expects both core and headline inflation to remain between 2.5%-3.5% this year, reflecting ongoing price pressures in the economy [2cca61e8].
Despite the strong performance of the Singapore dollar, analysts caution that further gains may be limited. OCBC Bank's Christopher Wong noted that while the currency has performed well, it may face challenges in sustaining its upward trajectory [41890aa5]. The MAS does not disclose specific details about the currency basket or the pace of appreciation or depreciation, but it continues to utilize the local dollar as its main policy tool [2cca61e8].
Additionally, Singapore government bonds have faced challenges, being the worst-performing in Southeast Asia this year with losses exceeding 4% [9af20e4a]. The upcoming policy review by the MAS is unlikely to provide much relief for bond investors, given persistent inflation and solid economic data [9af20e4a]. The MAS is not expected to change its policy until October unless inflation declines significantly in the coming months [9af20e4a]. The 6-month Singapore T-bill yield has recently fallen to 3.35%, and the upcoming T-bill auction is set for 15 August, with cash applications due by 9 PM on 14 August [f7a84c6e].
In the broader context, the yen and Malaysian ringgit have also shown strength, rising by 7% and 4% respectively against the Singapore dollar since early July, influenced by the unwinding of carry trades and potential fuel subsidy cuts in Malaysia [8f6c3a12]. This adds another layer of complexity to the dynamics affecting the Singapore dollar as it navigates through a challenging economic landscape.