10. The Plunging Singapore Dollar

By Bryan Lee,
Economics Correspondent,Singapore Straits Times


THE value of the Singapore dollar yesterday suffered its largest fall against the US dollar in two years, diving 1.2 per cent to $1.40 to the greenback.

The plunge propelled the local currency to its biggest weekly drop against the US dollar in four years.

The US dollar is the most widely used currency in international trade and acts as a common benchmark for both businesses and policymakers worldwide.

Why this near free fall in the Singdollar? Analysts say anxieties over slowing economic growth have now overtaken inflation concerns. When inflation was enemy No. 1, a strong Singdollar was a given.

The local currency, along with the euro, yen and other major currencies, are being assailed by growing signs that America's economic slump is spreading worldwide. The greenback, which has already been hurt by US economic woes, ironically stands tall in these bearish times.

Two other factors mean the Singdollar is losing ground, analysts say. Firstly, falling energy and commodity prices are seen to erode inflation's threat. Secondly, local interest rates, at a paltry 1 per cent, are prompting investors to move their money to higher-yielding currencies.

'With global growth slowing rapidly and oil prices coming off sharply, the local market is shifting its focus to growth from inflation,' said UBS currency strategist Nizam Idris.

Currency experts reckon the Singdollar is likely to weaken further in the coming months, though yesterday's nosedive is unlikely to be repeated.

But they say the Monetary Authority of Singapore will probably maintain its policy stance, allowing for Singdollar appreciation, at the next review in October.

They say the MAS is likely to keep this stand as it is far from clear that the inflation beast has truly been slain. MAS manages the currency against an undisclosed basket of currencies of its top trading partners. It has moved in the last two reviews to allow for a faster appreciation. A stronger Singdollar makes imports cheaper, which helps rein in inflation, but it also makes exports less competitive.

Bearish growth comments on Thursday from the European Central Bank, usually concerned only with inflation, and a warning from Tokyo that the world's No. 2 economy may be in a recession, sent the euro down 1.7 per cent and the yen down 1 per cent.

Other currencies, including the ringgit, Indonesian rupiah, Philippine peso and Taiwan dollar, also recorded sharp falls in what Mr Nizam has described as an 'ugliness contest' in which currencies are repriced as the weakness of their underlying economies becomes apparent.

'People now forget the decoupling theory. The only currency that has already priced in its negative economic environment is the US dollar. For other currencies, adjustments are being made as their economies are now expected to record weaker growth,' he said.

Standard Chartered Bank foreign exchange strategist Callum Henderson points out that Asia is especially vulnerable to a global slowdown as it is the region most open to world trade. This may prompt policymakers to ease monetary policy and cut borrowing costs to help sustain economic activity. 'Interest rate expectations have shifted a lot in Asia and Europe towards rate cuts,' he said.

In Singapore, analysts say the central bank may be letting the Singdollar slide within the overall band of appreciation as inflation, which has hit 26-year highs, seems to have peaked. A recent fall in oil and commodity prices, inflation's biggest drivers, may be prompting policymakers to shift attention to economic growth. Oil, which recently hit US$147 a barrel, is now trading at around US$120.

Experts say the Government appears more bearish over local economic prospects. Finance Minister Tharman Shanmugaratnam on Thursday said growth is unlikely to rebound 'any time soon'.

'The stronger Singdollar is now a double whammy for exports and growth at a time when external demand is already weak,' said Citigroup economist Kit Wei Zheng. 'Regional tech exports have weakened in recent months but the underperformance of Singapore's exports has been alarming.'

Looking ahead, further weakness in the Singdollar is likely, say analysts.

But Mr Nizam feels the pace of weakening may not be as rapid until clearer signs that inflation is really abating appear. Oil prices, for instance, can rebound as quickly as they fell. 'Singapore's domestic fundamentals haven't changed drastically and underlying inflation is still firm.'