Analysts warn that the Singapore dollar’s strength could ease if the US economy avoids a recession and further rate cuts are implemented.
SINGAPORE: The Singapore dollar may lose some of its strength in the coming months, analysts predict, particularly if the US economy experiences a soft landing.
The recent surge of the Singapore dollar to its highest level in 10 years against the US dollar was largely driven by the weakening of the greenback, according to analysts. As of August 23, the Singapore dollar was trading around 1.30 to the US dollar, a level not seen since 2014.
However, experts warn that the situation could reverse if the US economy avoids a recession, and the US dollar strengthens as a result. According to Mr. Sim Moh Siong, a currency strategist at Bank of Singapore, the market may have gotten ahead of itself in terms of anticipating an aggressive pace of interest rate cuts.
“We are still in the non-recession camp,” Sim said. “We think that the market has gotten ahead of itself in terms of anticipating an aggressive pace of rate cuts.”
Mr. Peter Chia, senior FX strategist at UOB, also sees a weakening in the Singapore dollar in the future. He expects that, against the backdrop of a US soft landing and gradual rate cuts, higher-yielding Asian currencies will likely gain strength.
UOB projects that the Monetary Authority of Singapore (MAS) will normalize its policy by modestly easing the appreciation of the Singapore dollar’s nominal effective exchange rate (S$NEER) in October. “The SGD’s strength relative to regional currencies may ease in the coming months,” Mr. Chia added.
Rate Cut Expectations
The US dollar’s recent weakness is attributed to market expectations of interest rate cuts, following disappointing economic data. Federal Reserve Chairman Jerome Powell’s comments at the Jackson Hole Economic Symposium last week further supported the view that a rate cut is on the horizon.
“The recent move has arguably been very centered around shifting rate expectations for the USD alone,” said Mr. Manpreet Gill, chief investment officer of Africa, Middle East, and Europe at Standard Chartered.
Mr. Chia from UOB said that a temporary push below the 1.30 mark for USD/SGD could be expected in the near term if further softness in US inflation data intensifies expectations of Fed rate cuts.
The market is currently expecting up to 100 basis points in rate cuts for the remainder of the year, with only three Fed meetings left in 2024. Given that the Fed usually moves by 25 basis points at a time, this would indicate a larger-than-normal cut of 50 basis points at one of those meetings.
“What’s changed is the market now expects a much more aggressive pace of easing because of US recession concerns,” Mr. Sim said. “The labor market report raised fears in the market, and the next one due in early September will shape market expectations.”
Factors Behind the US Dollar Weakness
Mr. Sim outlined two additional factors that could contribute to the US dollar’s weakening. One reason is the possibility that US Vice President Kamala Harris may have a better chance of winning the next election than President Joe Biden. When former president Donald Trump was leading, the market was worried about tariff risks, which contributed to the dollar’s strength.
The second factor is the unwinding of carry trades, in which investors borrow in low-interest currencies like the yen to invest in currencies with higher interest rates, such as the Indonesian rupiah. The unwinding of these trades has led to substantial yen strength, which in turn benefits other Asian currencies, including the Singapore dollar.
Other Currency Pairs
The Japanese yen and Malaysian ringgit have both gained against the Singapore dollar since July, with the yen strengthening by 7% and the ringgit by 4%, according to Mr. Sim. The yen’s strength is partly attributed to the Bank of Japan’s interest rate hikes, with future moves depending on whether the central bank continues on this path.
For the ringgit, Mr. Sim speculates that companies receiving payments in US dollars may choose to sell them in exchange for ringgit, especially given expectations of a weaker US dollar moving forward. If Malaysia’s government successfully reduces fuel subsidies, the ringgit could strengthen further, improving Malaysia’s fiscal position and potentially raising its sovereign credit rating.
