Rising S’pore Dollar Could Reach New Highs, Boosting Economy

Source : TODAY, Thursday, October 11, 2007

A SURPRISE monetary tightening by Singapore’s central bank pushed the Singapore dollar up sharply and put it on track to match its all-time high set in 1995.

The stronger Singapore dollar will help cap mounting price pressures in the city state but will not cause exporters to lose their competitive footing against regional rivals because other Asian currencies are also on an upward course against a swooning US dollar, analysts said.

“The stronger Singapore dollar is not going to put a massive downward pressure
on exports,” said Ms Prakriti Sofat, an HSBC economist.

“The appreciation is still going to be very gradual and we think the Government is going to be very cautious about maintaining economic growth.”

The Singapore dollar rose to a 10-year high against the US currency early yesterday after the Monetary Authority of Singapore (MAS) said it would “increase slightly” the slope of its undisclosed tradeweighted currency band. The US dollar fell to $1.4631 — a point last reached in July 1997 — from $1.4720 just before the MAS issued the statement.

Citigroup economist Chua Hak Bin said the new policy may allow the tradeweighted currency to rise an extra 0.2 to 0.5 percentage points each year beyond the estimated 1.9 per cent rate allowed previously. He expects the US dollar to finish next year at S$1.3900 compared to a previous forecast of S$1.4100.

That target is just above the Singapore dollar’s record high set in May 1995, when the greenback fetched only S$1.3835. The Singapore dollar may approach the record more quickly if the country’s red-hot economy maintains momentum, Mr Chua said.

“Further MAS tightening may be necessary next year, via more ‘slight’ finetuning,” Mr Chua said. “Lower Singapore dollar interest rates, following the Fed rate cuts, have exacerbated demand pressures.”

The more hawkish stance by Singapore’s central bank stems from concerns that rising inflation could pose a growing risk to the economy, which has been booming on growth in financial services and surging output of pharmaceuticals and offshore oil rigs.

The MAS statement noted the local three-month interbank interest rate has fallen to about 2.5 per cent from 3.5 per cent in February. It forecast inflation would stay within a 1.5-to-2-per-cent range this year and 2 to 3 per cent next year, but warned about the impending impact of rising residential rents and property prices.

This means Singapore, which uses the foreign exchange rate to influence prices because external trade dwarfs the domestic economy, would likely be willing to let its currency rise at a moderately faster pace.

HSBC’s Ms Sofat said the strength in the Singapore dollar is in line with gains in other Asian currencies. The Singapore dollar has gained about 5 per cent against the US dollar in 2007 while the Chinese yuan has risen 4 per cent and the Malaysian ringgit is up nearly 10 per cent.

“The MAS is keeping a conservative view and it’s unlikely we’ll see exports threatened,” she said, expecting Singapore’s economy to decelerate only slightly next year from the MAS’ 7 to 8 per cent target for 2007.

The central bank said it expects the economy to expand by 4 to 6 per cent in 2008, but both HSBC and Citigroup expect a higher rate of expansion. — DOW JONES