Singapore dollar faces downward pressure from US tariffs, expected policy shift

SINGAPORE – The Singapore dollar is under renewed pressure as US trade challenges are primed to worsen and as speculation of exchange-rate policy easing rises.

The Singapore dollar, which is already weakening as the US dollar recovers, faces fresh tariff threats after US President Donald Trump recently warned he

may impose tariffs on pharmaceuticals and semiconductors,

two of Singapore’s key exports.

Economists at firms such as Barclays and Asia Decoded expect the Monetary Authority of Singapore (MAS) to move to a more accommodative policy setting in July to support the economy.

“The tariff uncertainty, with higher tariffs on pharmaceuticals likely on Aug 1, could add to growth headwinds for Singapore in the second half,” said Mr Moh Siong Sim, a currency strategist at Bank of Singapore. The local dollar may weaken towards $1.30 to the greenback in the near term, especially if rising tariffs stoke US inflation and delay Federal Reserve interest rate cuts, he said.

The Singapore dollar was at 1.2830 to the US dollar at 6.15pm local time on July 21. In the year to date, the Singapore currency has risen 6 per cent against the greenback.

Those concerns are echoed by Ms Priyanka Kishore, principal economist at Asia Decoded. “Singapore is not only at a disadvantage from the prospect of sectoral tariffs on pharmaceuticals and semiconductors, but may also see an increase in the base rate of 10 per cent on Aug 1,” she said. 

Some strategists believe MAS will ease policy when it meets later in July, given inflation appears subdued. Economists predict data due on July 23 will show core inflation rose by just 0.7 per cent in June. 

MAS will flatten the slope of its Singapore dollar nominal effective exchange rate, or S$Neer, policy band by 50 basis points to zero in July, rather than waiting, Barclays Bank economists wrote in a note last week.

Unlike many of its global peers, Singapore’s central bank manages inflation by adjusting the S$Neer policy band rather than altering interest rates. With the S$Neer trading near the top end of the band, any flattening of the slope will cap the currency’s relative strength to its major trading partners. 

“With the MAS likely to stay on an easing path and flatten the slope of the S$Neer in July, our bias is for further Singapore dollar weakness,” Ms Kishore said.

While Singapore’s central bank looks likely to ease policy, bets on Fed rate hikes have been pushed back as policymakers watch for tariff-related inflation, bolstering the US currency.

The Singapore dollar’s use as a funding vehicle for carry trades may also weigh on its outlook. Carry trades are a type of foreign exchange trade in which money is borrowed in one currency at low interest and invested in another currency that provides a higher rate of return.

Bloomberg Intelligence said in July that three of the four emerging-market exchange factor models it uses in its analysis have gone long the Indonesian rupiah versus short the Singapore dollar. BLOOMBERG