The Singapore dollar beat out all its Asian counterparts in each of the past two years. The chance of leading the region for a third straight year rests with the central bank.
The currency gained 1.5% in 2023 as the Monetary Authority of Singapore kept its policy band with an appreciating bias at both its April and October meetings to counter inflation. Economists predict the MAS will maintain that setting again this year, with some even anticipating further tightening if inflation proves intractable.
“While we continue to expect the MAS to refrain from adjusting FX policy through 2025, the risk of a 50 basis-point slope increase has risen,” Brian Tan, senior regional Asean economist at Barclays Bank Plc in Singapore wrote in a client note last week, citing core inflation that’s “proving to be stickier than its historical average.”
While most central banks manage their economies through setting interest rates, the MAS does so by influencing the local currency. It determines the slope, width and mid-point of a policy band for the Singapore dollar’s nominal effective exchange rate, or S$NEER, which measures the local dollar against a basket of currencies of its major trading partners.
Inflation has been on a downward trend since early in 2023, with the core CPI gauge favoured by the MAS dropping to 3.2% in November, from as high as 5.5% in February. Still, that remains well above the five-year average of 2%, providing a reason for the central bank to keep its strengthening bias for the currency.
See also: MAS set to hold monetary policy as inflation persists
Another positive for the Singapore dollar may be the underlying strength of the economy. The nation’s gross domestic product expanded 2.8% in the fourth quarter, easily beating the median economist forecast of 1.8%, government data showed Tuesday.
‘Middling Currency’
Even if MAS decides to keep its appreciative settings for the currency, that doesn’t guarantee the Singapore dollar will once again top the Asian rankings.
See also: Singapore's headline inflation rebounds to 3.7% y-o-y; core inflation up to 3.3% y-o-y in December
“With the S$NEER nudging up against the top end of the policy bands, scope for sustained SGD outperformance is greatly diminished,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. The local dollar “is more likely than not to be a middling currency,” he said.
The MAS did make one change at its October gathering, doubling the number of meetings each year to four. That means traders will get their next insight into the central bank’s policy later in January, instead of waiting all the way until April as was the case in previous years.
