MAS Tightening Puts Singapore Dollar On Track For New Record

A surprise monetary tightening by Singapore's central bank Wednesday vaulted the Singapore dollar up sharply and put it on track to rise to its all-time high set during the 1990s boom.

The stronger Singapore dollar will help cap mounting price pressures in the city state but won't cause exporters to lose their competitive footing against regional rivals because other Asian currencies are also on an upward course against a swooning U.S. dollar, analysts say. "The stronger Singapore dollar is not going to put a massive downward pressure on exports," said Prakriti Sofat, an economist at HSBC in Singapore. "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 sprung to a 10-year high against the U.S. currency early Wednesday after the Monetary Authority of Singapore said it would "increase slightly" the slope of its undisclosed trade-weighted currency band. The U.S. dollar fell to S$1.4631 - a point last reached in July 1997 - from S$1.4720 just before the central bank issued the statement. Citigroup economist Chua Hak Bin said the new policy may allow the trade-weighted currency to rise an extra 0.2-0.5 percentage point each year beyond the estimated 1.9% rate allowed previously. He now expects U.S. dollar to finish 2008 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 U.S. currency fetched only S$1.3835. And the local currency may approach the record more quickly if Singapore's red-hot economy maintains momentum, Chua said. "Further MAS tightening may be necessary next year, via more 'slight' fine-tuning," Chua said. "Lower Singapore dollar interest rates, following the Fed rate cuts, have moreover exacerbated demand pressures."

Bid To Tame Inflation

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 central bank's statement noted the local three-month interbank interest rate has fallen to about 2.5% from 3.5% in February. It forecast inflation will stay within a 1.5%-2% range this year and 2%-3% in 2008, but warned about the impending impact of rising residential rents and property prices. That means Singapore, which uses the foreign exchange rate to influence prices because external trade dwarfs the domestic economy, is likely willing to let its currency rise at a moderately faster pace. "Against a robust growth backdrop, the MAS is clearly taking no chances when it comes to the inflation outlook, hence the tightening step," Rabobank said in a note to clients. Rabobank now forecasts the U.S. dollar will drop to S$1.4300 by the end of 2008, lower than its forecast of S$1.4400 before the MAS policy statement. To be sure, the central bank will be vigilant against sharp swings in foreign exchange rates. It has demonstrated a willingness to keep a tight grip on the currency. JPMorgan Chase Bank and Societe Generale noted unconfirmed talk in the market Wednesday that the Singapore authorities had intervened to cushion the U.S. dollar's early plunge, though other traders played down such speculation. Still, traders have said the MAS was active in the market during periods of heightened volatility last month to prevent drastic appreciation. And late last year the central bank added tens of billions of U.S. dollars in currency forward exposure in an apparent effort stem the local currency's rise. HSBC's Sofat said the strength in the Singapore dollar is in line with gains in other Asian currencies. The Singapore dollar has gained about 5% against the U.S. dollar in 2007 while the Chinese yuan has risen 4% and the Malaysian Ringgit is up nearly 10%. "The Singapore dollar has been appreciating, but the rest of the currencies across Asia are also moving higher," Sofat said. "The MAS is keeping a conservative view and it's unlikely we'll see exports threatened," she added. She said Singapore's economy may decelerate only slightly next year from the MAS's 7%-8% target for 2007.