Why It Matters

Singdollar set to stay strong

Posed photo of hand holding Singapore dollar notes.
Posed photo of hand holding Singapore dollar notes.PHOTO: ST FILE

With each new piece of economic data released in recent weeks the overall picture has grown drearier and drearier, but the Singdollar is set to remain relatively strong amid the gloom.

Yesterday's numbers showed that the economy suffered five straight months of shrinking manufacturing output, prompting some economists to warn of a growing risk of a technical recession, defined as two consecutive quarter-on-quarter declines in output. Despite this, the central bank is unlikely to slow the appreciation of the Singapore dollar at its next scheduled policy meeting in October.

The Monetary Authority of Singapore (MAS) uses the exchange rate as its main tool to strike a balance between controlling inflation from overseas and laying the foundations for economic growth.

The exchange rate is managed against a basket of currencies of Singapore's major trading partners.

A stronger currency helps counter inflation by making imports cheaper in Singapore dollar terms, while a weaker dollar helps exporters, whose goods become cheaper in foreign markets.

Singapore's overall rate of inflation has been negative for eight straight months, with core inflation skirting close to zero. While this ostensibly means the central bank should be able to turn its focus to growth instead of keeping inflation in check, the latest bout of falling prices is largely the result of cheaper oil and loan curbs that have dampened the property and car markets. Economists do not regard this run of falling prices as "deflation", a term reserved for a more sustained and entrenched economic problem with often dire results. In fact, prices of everyday essentials such as food and services have continued to tick up every month, and the central bank has warned that the tight labour market is putting pressure on wages to rise, which will drive up costs for firms and eventually consumers.

Barring a significant downturn in the coming months, most economists expect MAS to maintain its stance of a modest and gradual appreciation of the Singapore dollar against major trading partners.

A version of this article appeared in the print edition of The Straits Times on July 25, 2015, with the headline 'Singdollar set to stay strong'. Print Edition | Subscribe