CNA Explains: Singdollar up against most major currencies – why and what that means for you
The Singapore dollar has touched all-time highs against the yen and ringgit, and strengthened against the euro and the pound. What does this mean for holidaymakers and businesses?
SINGAPORE: The Singapore dollar has been growing in strength and trading at record levels against several currencies.
For instance, the Japanese yen. At the start of the year, one Singapore dollar would get you about 85 yen. This rose to an all-time high of 99.71 yen on Thursday (Jul 21) – marking an increase of about 17 per cent from the start of the year.
The Singapore dollar also broke its record against the Malaysian ringgit on Thursday as it touched 3.2062, up 4 per cent from about 3.08 at the start of January.
The local currency has been strengthening against the euro and the pound as well, touching historical peaks last week.
Wall Street Journal data showed the euro trading at S$1.4297 on Thursday, just shy of the S$1.3969 low on Jul 14. At the start of the year, one euro could get S$1.5352.
The pound also saw its worst day against the Singdollar on Jul 14, hitting a record trough of S$1.6587. It started the year above S$1.80.
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? We ask the experts.
A divergence in global central bank actions and country-specific factors have 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.
For example, the euro 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.
“The starting point of understanding all these currency movements is the Fed and its rate hikes due to inflation. Then you look at the other countries to see who has or has not matched the United States in terms of rate hikes,” said DBS Group’s senior foreign exchange strategist Philip Wee.
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) on Thursday left its rock-bottom interest rates unchanged, reiterating that the recovering economy still needs support.
With the BOJ remaining an outlier among its peers, the yen will likely continue to underperform, said MUFG’s senior currency analyst Jeff Ng.
In Europe, a precarious growth outlook had kept central bankers dovish until Thursday 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, said Mr Wee, whose current estimates for the pound entail the scenarios of an economic hard landing and political crisis.
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, according to Mr Ng.
Back home, the Monetary Authority of Singapore (MAS) has tightened monetary policy four times in about nine months, with the latest on Jul 14 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”.
Altogether, Mr Ng noted that the Singdollar has appreciated about 4.4 per cent against a basket of currencies since the MAS’s first move in October last year.
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, Mr Ng said.
“The key manufacturing sector continues to be supported by electronics. Modern services like financial services are also doing quite well, while those that were previously hit by the pandemic are on the way for recovery,” he added.
“The economy still doing relatively well is another reason for Singdollar’s outperformance against most currencies.”
That said, the local currency remains largely on the backfoot against the turbocharged US dollar.
Even after the jolt from MAS’ latest tightening move, the Singdollar last traded at 1.3938 against the US dollar on Thursday afternoon, down about 4 per cent year to date.
THE WINNERS AND THE LOSERS OF A STRONGER SINGDOLLAR?
An appreciation in the Singdollar against most currencies means that for those 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. But experts told CNA that the effects may be less clear cut this time.
For one, Mr Ng pointed out that much of international trade remains priced in US dollars.
“So while the Singdollar may have gained against other currencies, weakness against the US dollar still means that any potential benefit will be mitigated.”
Agreeing, Mr Ang Yuit, vice-president of the Association of Small and Medium Enterprises, said while there may be some “positive help” when it comes to offsetting supply chain costs, any benefit from a firmer Singdollar this time round will “be more targeted” based on where a company sources for raw materials, bases its production and eventually sells its products to.
“Currency fluctuation and its impact on businesses is not that simple and straightforward,” he said.
“Take for example a garment business which most likely has its production based in Vietnam and then exported elsewhere. In this case, the Singdollar going up does not really help the company much, apart from allowing them to invest or hire more in Vietnam for example.”
On exports, Minister of State for Trade and Industry Alvin Tan said in a Parliamentary speech that a stronger Singdollar is “not expected to have a significant negative impact”.
This is because Singapore’s exports are primarily dependent on demand, rather than the exchange rate. They are also “high value-added products and services, where demand is less sensitive to price and therefore, exchange rate changes”, he told the House in May.
CIMB Private Banking economist Song Seng Wun cited the strong performance in Singapore’s non-oil domestic exports thus far, noting that it would be “hard to say there’s a blanket impact” on the country's exporters.
Nonetheless, some negative repercussions can still be gleaned from the MAS’ annual report released this week, said Mr Song.
The central bank recorded a loss of S$7.4 billion in the last financial year, citing lower investment gains on the country’s foreign reserves and a stronger Singdollar. This means that companies with operations overseas but report earnings in the home currency will face similar negative foreign exchange translation effects.
“Let’s say you are a hospitality operator with many hotels in different parts of Europe and Japan. As long as you report your earnings in the Singapore dollar, you will get the currency translation losses,” the veteran Singapore economy watcher explained.
In addition, a stronger Singdollar may throw up some hurdles for the recovery of the local tourism sector, as foreign holidaymakers opt for cheaper destinations, said Mr Ng.
More generally, currency movements also signal broader shifts or concerns in the world economy.
“The fear is that with central banks going for monetary policy tightening and other uncertainties remaining, there might be a recession around the corner and an impending slowdown in global demand, which for open economies like Singapore, won’t be so good news,” Mr Song said.
A TURNING POINT LATER DOWN THE ROAD?
Things could be changing, according to Mr Wee, who foresees a “turning point” soon for the US dollar's rally.
“Dollar strength has been riding a lot on safe haven flows so far, without really reflecting the deterioration in the US economic numbers. Also normally, when you get into the second half of the rate-hike cycle, the market will start thinking about the impact of the hikes and the recession risk in 2023.”
Further, more global central banks are now catching up with monetary policy tightening.
“The inflation problem started out as a supply-side issue but supply chain disruptions, as we are hearing, are easing. The problem is now demand-side (factors) like wages and corporate pricing ... and that has prompted other central banks to jump in with bigger hikes,” said Mr Wee.
Mr Ng also reckoned that the Singdollar may run out of strength against other currencies next year when economic prospects dim in face of possible economic slowdowns in the US and China.