The Singapore dollar has rallied by some 6 per cent against the US currency since March and analysts see more strengthening ahead.
However, this is unlikely to have a significant bearing on the trade-weighted value of the currency targeted by the Republic's central bank to achieve its monetary policy goal of price stability.
Trade-weighted stability means the local dollar has moved in line with other major trading partners' currencies - euro, Japanese yen, Chinese yuan, Malaysian ringgit - and thus has little impact on its export competitiveness.
The Singapore dollar was trading at around 1.3710 versus the US dollar at the time of writing. The currency has come a long way from the 11-year low of 1.4610 on March 23 - the peak of the global financial market panic induced by the Covid-19 pandemic.
On March 30, the Monetary Authority of Singapore (MAS) slightly reduced the rate of appreciation of the trade-weighted, or S$NEER, policy band. The central bank said it will adopt a zero per cent per annum rate of appreciation of the policy band starting at the prevailing level of the S$NEER.
Mr Sim Moh Siong, currency strategist at the Bank of Singapore, said the policy move by MAS was aimed at stabilising financial conditions by ensuring a stable trade-weighted exchange rate.
"Financial conditions have stabilised, interest rates are low from where they were earlier this year, even the stock market has recovered. I would call it a desirable outcome," he said.
Mr Eugene Leow, interest rate strategist at DBS, said flush global liquidity conditions due to accommodative central bank policies across the globe are forcing investors to seek yield.
"Some of those monies are finding their way into Singapore, helping to nudge down Singapore dollar interest rates in the process. Our Singapore government securities are still relatively attractive compared to US Treasuries," he said.
Mr Sim expects the Singapore dollar to continue on the path of appreciation on a nominal basis, reflecting the strength of currencies in its trade-weighted basket against the US dollar.
His forecast is that the local dollar would reach S$1.32 in 12 months, in line with the euro's rise to US$1.25 from around US$1.19 now. "Given the trade-weighted stability of the Singapore dollar, we don't expect any fireworks at the MAS' October policy meeting, i.e. MAS will maintain the current policy stance," he added.
The greenback will continue to weaken for the next several years - a policy goal of the US Federal Reserve.
"The Federal Reserve wants to keep the interest rates low to support US economic recovery and that means a weaker dollar," he said.
However, the speed of the US dollar's decline has raised eyebrows.
A resurgence of Covid-19 infection rates in the US, combined with the European Union's unprecedented US$2 trillion aid and budget deal last month, tipped the odds in favour of the euro.
Mr Philip Wee, currency strategist at DBS, said: "We had profiled a weaker US dollar for the post-pandemic recovery in our currency forecasts but were surprised at how quickly the market has brought forward this expectation."
He expects the Singapore dollar to be underpinned at around S$1.35, unless the euro pushes towards US$1.25 at a faster-than-expected pace.
UOB Group's senior FX strategist Peter Chia noted that the Singapore dollar also continues to track the Chinese yuan's gains against the US dollar amid expectations of a firmer economic recovery in China in the second half of the year.
"The Singapore dollar therefore remains vulnerable to the volatility that an increasingly tense US-China relationship would bring. While we expect the Singapore dollar to strengthen further, proxy hedging for geopolitical risk may limit its gains," he said.
