Singapore dollar could weaken in coming months, analysts say

SINGAPORE: The relative strength of the Singapore dollar may wane in the coming months if the US economy experiences a soft landing, analysts said.
The weakness of the US dollar was the key reason the Singapore currency reached 10-year highs against the greenback recently, they added.
According to Bloomberg, the Singapore dollar hit levels last seen in 2014 against the US dollar last Friday (Aug 23). It has traded around 1.30 against the US dollar this week, compared with 1.337 at the start of August and 1.358 in early July.
If economic data shows that the US can avoid a recession, the US dollar could regain some strength, said Mr Sim Moh Siong, a currency strategist at Bank of Singapore.
“We are still in the non-recession camp,” he said. “We think that the market has gotten ahead of itself in terms of anticipating an aggressive pace of rate cuts.”
Mr Peter Chia, a senior FX strategist at UOB, said that against the backdrop of a US soft landing and gradual rate cuts, higher-yielding Asian currencies will gain.
UOB expects the Monetary Authority of Singapore (MAS) to normalise policy in October through “modest easing” of the appreciation of the Singapore dollar nominal effective exchange rate (S$NEER).
“The SGD’s strength relative to regional currencies may ease in the coming months,” Mr Chia said.
The US dollar weakened as markets priced in interest rate cuts after lacklustre data, said Mr Manpreet Gill, Standard Chartered’s chief investment officer of Africa, Middle East and Europe.
He added that Federal Reserve chairman Jerome Powell’s comments at the Jackson Hole Economic Symposium last week were supportive of a rate cut.
“The recent move has arguably been very centred around shifting rate expectations for the USD alone,” Mr Gill said.
“Gauging from the momentum, a temporary push below 1.30 for USD/SGD would not be surprising in the near term if further softness in US inflation data intensify Fed rate cut expectations,” said Mr Chia of UOB.
Bank of Singapore’s Mr Sim said the market is now expecting 100 basis points of rate cuts for the rest of the year, and there are only three meetings left in 2024.
The US Federal Reserve usually moves 25 basis points at a time, so that means the market expects a larger-than-normal cut of 50 basis points at one of the meetings this year.
“What’s changed is … the markets are now expecting a much more aggressive pace of easing because of US recession concerns,” said Mr Sim.
He said the labour market report raised fears in the market, and the next one – due in early September – would shape market expectations about whether to be more relaxed or more wary.
Mr Sim also outlined two other reasons why the US dollar may have weakened.
The first is that US Vice President Kamala Harris appears to have a better chance of winning the elections, compared with US President Joe Biden.
Earlier, when former president Donald Trump was leading, the market was worried about tariff risks and that led to a stronger dollar.
The second reason for US dollar weakness is that carry trades – where investors borrow in a currency with lower interest rates such as the yen to invest in a currency with higher interest rates such as the Indonesian rupiah – are starting to unwind.
“The unwinding of the carry trade has resulted in quite substantial yen strength,” said Mr Sim. Other Asian currencies tend to gain alongside the yen, so the Singapore dollar may have benefited from that, he added.
The Japanese yen and Malaysian ringgit have gained 7 per cent and 4 per cent against the Singapore dollar since the start of July, said Mr Sim.
For the yen, its strength has come in part from the Bank of Japan raising interest rates, and further moves depend on whether the central bank continues on this path.
For the ringgit, Mr Sim said companies sometimes receive payment in US dollars and do not convert it into the local currency.
However, due to concerns about a US recession, some companies may expect the dollar to be weaker moving ahead, and may choose to sell the greenback in exchange for the ringgit.
That may be the reason why the ringgit has strengthened, he said.
It could strengthen further if the Malaysian government makes progress on fuel subsidy cutbacks, he added.
The fiscal position of the government would improve, and the sovereign credit rating may also go up. “That will be perceived as a medium-term positive for the currency,” he said.