Singapore Dollar to Continue Gains

For a currency that managed to gain more than nine percent over the past year, the Singapore dollar received remarkably little attention internationally. Perhaps this is because it is overshadowed by its much larger neighbor to the north, but poised for another year of strong growth and further appreciation of its currency, be assured investors are paying closer attention to Singapore and this growing Asian powerhouse.

Like all the exporting nations, Singapore felt the chill of the past recession as global demand for consumer products fell, but sales have since bounced back in a big way. For 2010, shipments rose by 23 percent to about $475 billion (US$369 billion) over the previous year and the overall economy grew by 14.7 percent.

Keep in mind however, that 2010 was the first full year following the global recession, and even though much work remains to make up for lost ground during the economic turmoil, growth is slowly returning to international economies. As growth intensifies in the Western markets, so too has demand for Singapore’s exports and this has been wisely supported by actions taken last April by the Monetary Authority of Singapore (MAS) to ease monetary policy to help fuel the recovery.

MAS and Monetary Authority

MAS conducts its monetary policy by directly managing the SG dollar exchange rate. Using a basket of currencies as a benchmark, MAS intervenes in the currency market by buying and selling the currency in order to keep the value of the SG dollar within a band defined by the basket.

Known as the Nominal Effective Exchange Rate (NEER), MAS shifted the exchange rate lower relative to the NEER last April to devalue the currency. By decreasing the value of the SG dollar, MAS hoped to make exports more competitive with goods from other exporters and it is clear that the strategy has paid dividends. In fact, attention has now turned to inflation and MAS is considering the need to push the exchange rate higher to slow the rate of growth and keep domestic prices in check.

This action is not without consequences and currency valuation is always a tricky matter for any exporting market as a valuation increase makes it more expensive for foreign buyers to convert their own currency to that of the exporting region. However, with inflation threatening to push prices beyond the scope of consumers, action on the part of the Singapore’s monetary authority is necessary.

Singapore Dollar Outlook

Even though an increase in the exchange rate could reduce demand for Singapore’s exports from last year’s lofty totals, the overall export business is still expected to be robust. Weak growth – but growth nonetheless – is expected in markets in the U.S. and Europe and this will contribute to continued demand for the SG dollar. Foreign investment is also likely to help support the currency as investors naturally seek opportunities that balance return with safety of funds and the SG dollar scores highly in both categories.

These days, opportunities for above-average returns with excellent protection from losses are few and far between, and this makes the Singapore dollar a very attractive option. Currently, one SG dollar is trading at just under US$1.28 but some analysts suggest that by the end of the year, the Singapore dollar could gain another six percent rising to US$1.20.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.