Why It Matters

Curious case of weaker Sing$

Anyone who has visited the United States recently will have felt a shot of pain every time it came to buying greenbacks.

The Singdollar has taken a beating against the US currency this year, falling 12 per cent since January and sinking to 1.4271 to the greenback yesterday.

That is just a hair's breadth above its lowest level seen in 2009, at the height of the financial crisis.

The Singdollar has been caught up in the money market disruptions that have hit Asian currencies, a result of the impending US interest rate hike and concerns over China's slowdown.

There is an immediate hit, of course, as those travelling or studying in the US know all too well but, beyond that, the impact is multifaceted.

A weaker Singdollar to the US dollar concerns firms that do not have effective hedging.

Interest rates here are another issue. Loan rates are directly correlated not only to US interest rates, but also to the US-Singapore dollar exchange rate. So firms that borrowed extensively amid previously low rates may see earnings eroded at a time when the business outlook is already choppy.

But even in its weaker state, the Singdollar is still considered relatively stable compared to its regional counterparts, and this should attract more investment flows from neighbouring countries to seek safety here. The Monetary Authority of Singapore has consistently opted to keep the Singdollar exchange rate on a modest and gradual appreciation path, notwithstanding a surprise policy easing in January.

In contrast to the relative stability at home, emerging market currencies are in disarray. The Malaysian ringgit has dropped 20 per cent against the Singdollar, while the Indonesian rupiah has lost 8 per cent over the past 12 months.

Economists have noted that some easing in the Singdollar exchange rate will help Singapore's already struggling exports and growth, but the regional backdrop means that scenario is unlikely. With China's growth stalling and regional economies in a lurch, the demand for Singapore's exports has shown no sign of recovery despite the cheaper Singdollar.

The cost and benefit of currency swings, it would seem, are as muddled as the global outlook.

A version of this article appeared in the print edition of The Straits Times on October 02, 2015, with the headline 'Curious case of weaker Sing$'. Print Edition | Subscribe