Experts suggest that the Singapore dollar could lose strength if the US economy avoids a recession and interest rate cuts unfold as anticipated.
SINGAPORE: The Singapore dollar, which recently reached a decade-high against the US dollar, may face weakening pressure in the coming months if the US economy manages to avoid a recession, analysts have warned.
The Singapore dollar recently traded at around 1.30 to the US dollar, a level not seen since 2014, reflecting a significant appreciation from 1.337 at the start of August and 1.358 in early July.
According to Mr. Sim Moh Siong, a currency strategist at Bank of Singapore, if economic data indicates that the US can avoid a recession, the US dollar could regain some strength. “We are still in the non-recession camp. We think that the market has gotten ahead of itself in terms of anticipating an aggressive pace of rate cuts,” Mr. Sim stated.
Peter Chia, senior FX strategist at UOB, explained that higher-yielding Asian currencies, including the Singapore dollar, could benefit from a soft landing in the US economy and gradual interest rate cuts. However, he expects that the Monetary Authority of Singapore (MAS) will likely ease its policy in October, which could lead to a moderation in the appreciation of the Singapore dollar’s nominal effective exchange rate (S$NEER).
“The SGD’s strength relative to regional currencies may ease in the coming months,” Mr. Chia said.
US Dollar Weakness and Rate Cut Expectations
The US dollar has come under pressure, largely due to market expectations of interest rate cuts by the Federal Reserve. Mr. Manpreet Gill, Chief Investment Officer at Standard Chartered, noted that Federal Reserve Chairman Jerome Powell’s recent comments at the Jackson Hole Economic Symposium supported the possibility of rate cuts.
“The recent move has been primarily driven by shifting expectations for USD interest rates,” Mr. Gill remarked.
Mr. Chia added that if US inflation data remains weak, it wouldn’t be surprising for the USD/SGD exchange rate to temporarily dip below 1.30, thereby increasing the likelihood of further rate cuts by the Federal Reserve.
The market is currently expecting 100 basis points of rate cuts by the end of the year, which is unusual as the Federal Reserve typically moves 25 basis points at a time, said Mr. Sim. “What’s changed is the expectation of faster rate cuts due to fears of a US recession,” he added.
Other Contributing Factors
In addition to rate cut expectations, Mr. Sim pointed to two other reasons contributing to the US dollar’s weakness. First, the increasing likelihood of US Vice President Kamala Harris winning the election over President Joe Biden has altered market sentiment. Previously, fears of tariff risks under former President Donald Trump had contributed to a stronger US dollar.
Second, the unwinding of carry trades, where investors borrow in currencies with lower interest rates (like the yen) to invest in higher-yield currencies, has also impacted the US dollar. As these carry trades unwind, the yen has strengthened, benefiting other Asian currencies, including the Singapore dollar.
Since early July, the Japanese yen and Malaysian ringgit have appreciated by 7% and 4%, respectively, against the Singapore dollar. Mr. Sim attributed the yen’s strength to the Bank of Japan’s decision to raise interest rates, with future moves depending on the central bank’s actions.
As for the Malaysian ringgit, Mr. Sim noted that businesses often receive payments in US dollars but may prefer to exchange them for ringgit, especially if they expect the US dollar to weaken. The ringgit may continue to strengthen if Malaysia moves forward with fuel subsidy reductions, improving the country’s fiscal position and potentially enhancing its credit rating.
