The Singapore dollar has been growing in strength and trading at record levels against several currencies. Against the Japanese yen at the beginning of the year, one Singapore dollar was about 85 yen. This rose to an all-time high of 99.71 yen on 21 July – marking an increase of about 17 per cent.
The Singapore dollar also broke its record against the Malaysian ringgit on 21 July as it touched 3.2062, up 4 per cent from about 3.08 at the start of January 2022. The currency has been strengthening against the euro and the pound as well.
Source: https://www.livemint.com
Meanwhile, the Singdollar is trading at multi-year highs against regional peers such as the South Korean won and the Thai baht.
What’s behind the Singdollar’s outperformance against these currencies? A stronger currency is obviously good news for those looking to travel, but are there implications for businesses and the broader Singapore economy?
A divergence in global central bank actions and country-specific factors has swayed the performances of various currencies.
It all starts with a more hawkish US Federal Reserve whose aggressive rate hikes have boosted the US dollar. Investors seeking a haven from global economic uncertainties have also flocked to the greenback, further fuelling the dollar’s ascent against other currencies.
The euro for example, fell below parity against the greenback on Jul 13 for the first time in nearly 20 years. Europe’s single currency has recovered to 1.0176 on Thursday afternoon but remains down against the US currency by more than 10 per cent down year to date.
This monetary policy divergence is perhaps most stark in Japan, where an accommodative policy stance remains firmly in place due to economic concerns. The Bank of Japan (BOJ) has left its rock-bottom interest rates unchanged. This suggests that the recovery in its economy still needs support. With the BOJ remaining an outlier among its peers, the yen will likely continue to underperform.
In Europe, a precarious growth outlook had kept central bankers dovish until 21 July when the European Central Bank took the first step to raise interest rates for the first time in 11 years. The euro has also been pressured by Europe’s front-line exposure to the Russia-Ukraine war. The war has sparked an energy crisis, alongside fears of a potentially long and deep recession in the region. Some global banks are forecasting a recession for the euro area as soon as the third quarter.
Likewise in the United Kingdom, inflation at a 40-year high and a recession risk have added to the downward trend in the pound. The recent resignation of Prime Minister Boris Johnson has deepened the uncertainty hanging over Britain’s economy.
For other countries such as India and the Philippines, currency weakness can also be attributed to their own widening trade deficits amid elevated commodity prices.
Then again, the Monetary Authority of Singapore (MAS) has tightened monetary policy four times in about nine months, with the latest on 14 Jul 2022 being an off-cycle surprise to re-centre the mid-point of the Singapore dollar nominal effective exchange rate policy band “up to its prevailing level”. The Singdollar has appreciated about 4.4 per cent against a basket of currencies since the MAS’s first move in October 2021.
Most economists believe that further tightening is in store if inflation in Singapore continues to heat up. Meanwhile, continued growth in the Singapore economy has given the local currency some additional upward momentum against regional peers.
An appreciation in the Singdollar against most currencies means that for those Singaporeans drawing up travel plans to destinations such as Europe or Japan, the exchange rates will be in their favour. Theoretically, importers or businesses with operations overseas may also reap some benefits while exporters, on the flip side, could be in for some pain.
Singapore's non-oil domestic exports (NODX) expanded for the 19th straight month, increasing by 9% year on year in June, though it was down from 12% in May, according to official data from Enterprise Singapore.
The largest contributors to the growth in the NODX were from Malaysia, Indonesia, and the United States. Electronic shipments increased by 4.1% in June, a sharp drop from the 12.9% growth in May, while non-electronic NODX rose by 10.6% in June, following the 11.7% rise in the previous month, according to the government agency.
Strong manufacturing and exports will be good for the economy, but Singapore does not have enough workers to fulfill the rising demand. Inflation in Singapore is the "key to watch" for the second half of the year. Inflation will likely remain "quite sustained" in the second half, and may start to cool by end 2022.
What can we learn?
MAS operates on an exchange rate centered monetary framework – that shields imported inflation to a large extent. Exports are not severely impacted as there is value-add and productivity to offset exchange translation. Singapore is a very open economy with total trade exceeding 300% of GDP. Key variables for MAS in its policy has been inflation, real GDP and unemployment.
BNM focuses on interest rate, real GDP and inflation, the latter to a lesser extent. Exchange rate is left to find its own level – hence, a more laissez faire attitude on this. Malaysian exporters glee on exchange rate depreciation while importers fear its repercussions. With net food bill of RM60 billion annually, it makes the B40 group fear inflation and the rising cost of living. Shouldn’t we raise OPR to fend off (or at least ameliorate) inflation?
References:
CNA explains: Singdollar up against most major currencies – why and what that means for you, Channel News Asia
A stronger Singapore dollar may be exactly what the country needs to battle inflation, says Barclay, Charmaine Jacob, CNBC, 19 July 2022
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