The Singapore dollar has been on a steady sprint upwards from its low in the 2008-2009 financial downturn, when it took nearly S$1.60 to buy a US dollar. After rising to S$1.28 to the US dollar at the start of 2011, it recently reached a new high of about S$1.22.
If anything, the trend is for an even stronger Singapore dollar. In mid-April the Monetary Authority of Singapore (MAS) said it will “re-centre the exchange rate policy band upwards”, meaning that the Singapore dollar is likely to rise even more.
Most products in Singapore are imported, and a stronger dollar means that prices can be cheaper.
Forecasters are talking about the Singapore dollar reaching $1.20 to the US dollar or higher.
The questions on many peoples’ minds, then, are how far the Singapore dollar will go and how to take advantage of – or protect against - its strength.
Different practices
When looking at exchange rates, it’s important to know that Singapore has somewhat different practices from many other countries. As the MAS has said, “since 1981, monetary policy in Singapore has been centred on the management of the exchange rate.”
Rather than focusing on interest rates, as central banks in the US and some other countries do, MAS intervenes in the foreign exchange market to “promote price stability as a sound basis for sustainable economic growth.”
MAS’s policy means that its outlook is crucial for forecasting future exchange rates. While it doesn’t explicitly disclose its targets, MAS does provide an update on its policy twice a year and statements like the one in April show the likely direction for exchange rates.
While the policy may sound esoteric, it directly affects what we buy every day.
Most products in Singapore are imported, and a stronger dollar means that prices can be cheaper.
A five percent rise in the Singapore dollar could mean that the Samsung Galaxy Tab costs $798 instead of about $840 and 10 kilograms of rice cost about $23.95 instead of $24.95. While the impact isn’t always so clear-cut and stores may take part of the difference, anything that’s imported - from cake and coffee to cars and computers – may cost a little less if the Singapore dollar strengthens.
The Economist Intelligence Unit
Forecasters have a variety of views about where the Singapore dollar will go. The Economist Intelligence Unit (EIU), for example, expects that “in 2011 the local currency will strengthen against the US dollar by nearly eight percent.”
However, the EIU also says that less inflationary pressure later in the year could mean that the MAS eventually tries to “slow the currency’s appreciation” so that it can “maintain the city state’s international competitiveness.” Credit Suisse has similar views.
On the other hand, some forecasters have had mixed results. After the MAS announcement in April, for example, both Citibank and UOB forecast a rate of 1.23 by year-end. The Singapore dollar sped through that level and beyond within a matter of days.
Foreign currency
With the Singapore dollar likely to head higher, the next issue is what to do about it. And the actions to take depend on one’s actual needs for foreign currency.
For Singaporeans and expats alike who don’t travel or have expenses abroad, the answer could be quite easy - do nothing.
There’s little need to protect against foreign currency swings if your expenses are in Singapore dollars. If a casual traveler does want to lock in a favorable rate, they could buy cash from a moneychanger or load cash on a prepaid card.
For people like expats with mortgage payments and other bills in their home country or Singaporeans paying their children’s school fees abroad, however, the situation isn’t quite so simple.
If their income or assets are primarily in Singapore dollars, they may be tempted to wait and take advantage of a strengthening Singapore dollar.
On the other hand, the dollar could still weaken at exactly the time they need to change money, as has sometimes happened in the past. One option is simply to exchange funds regularly to take advantage of cost averaging.
Forums like Expats Plaza also suggest that other strategies could include “targeting specific rates of exchange and changing currency if the market reaches your target” or fixing an exchange rate up to 12 months in advance using small-scale forward contracts, which are offered by several companies here.
Investment in other currencies
Some people may also be tempted to take advantage of even-faster-rising currencies through investments in Renminbi or Australian dollar deposits. While these deposits can result in gains, currency trading fees of up to eight percent charged by banks as well as volatility in exchange rates could wipe out much of the profits.
For many people, simply sticking with the Singapore dollar may be preferable.
In the end, it’s clear that even experts have difficulty forecasting foreign exchange rates. While the Singapore dollar looks like it will continue to strengthen in the long term, there could be significant ups and downs in the meantime.
The safer path for many individuals may well be to buy or sell foreign currency depending on their actual needs.
Richard Hartung | 27 May 2011
