News analysis

Vaccinated travellers need not worry about exchange rates amid steady outlook for Singapore dollar

Analysts say the benefit of exchanging your dollars now for a foreign currency will be marginal. ST PHOTO: KUA CHEE SIONG

SINGAPORE - For the lucky ones planning to use Vaccinated Travel Lanes (VTLs), there is one less thing to worry about when packing their bags - the Singapore dollar's exchange rate.

One of the world's most stable currencies, the local dollar can buy you any currency at a good rate any time of the year to cover your holiday shopping and dining needs.

But if you are planning to travel to the United States or Malaysia, among other destinations, later this year, maybe it's best to exchange your Singapore dollars for the greenback or the ringgit now than wait for your boarding date.

However, analysts say the benefit of exchanging your dollars now for a foreign currency will be marginal, as any weakness in the local dollar in the coming weeks and months will be temporary.

Singapore's plans to allow quarantine-free travel to more countries is part of a global easing of Covid-19-related restrictions as the number of fully vaccinated residents rises.

The move has raised hopes that more destinations will be added later on.

Australia and New Zealand recently loosened some curbs, Indonesia will welcome international travellers to its tourist island of Bali from Oct 14, and Malaysia may reopen its borders in December.

But the easing of mobility curbs and border controls is also unleashing consumer spending and, as a result, boosting prices of everything from oil, gas and coal to metals such as aluminium used to make cars, mobile phones and beer cans.

Adding to prices is also congestion at ports worldwide and supply bottlenecks for some raw materials and key components such as semiconductors.

Rising prices are working their way into the currency market as well.

Commodity exporters such as Australia, Canada, Indonesia and Malaysia may see higher energy and raw material prices boost their trade surpluses - a key determinant of the value of their currencies.

For example, rising coal and palm oil prices are pushing up the Indonesian rupiah - set to outperform its Asian peers this year. Palm oil and surging oil prices may help the ringgit as well.

On the other hand, large consumer economies such as the United States, European Union and Britain are losing their patience with inflation.

After declaring to keep interest rates low for longer last year, when they were fighting a global economic downturn, they are now turning hawkish - signalling that they will be raising their benchmark interest rates sooner rather than later.

Currencies usually gain in tandem with their benchmark bond yields. Thus, the US dollar has been on the rise as yield on 10-year Treasury bills rose.

In addition, UOB senior foreign exchange (FX) strategist Peter Chia said that potential growth slowdown in China will also weigh on Asian currencies and reinforce the US dollar's strength.

Mr Terence Wu, FX strategist at OCBC Bank, said the US dollar is expected to strengthen against the Singapore dollar into the year end.

Mr Wu expects the local dollar, which traded at around 1.35 to one US dollar on Monday (Oct 11), to ease to 1.3697 in December.

But the extent of the greenback's appreciation is likely limited, he added.

Goldman Sachs cut its US economic growth target to 5.6 per cent for 2021 and to 4 per cent for 2022, citing an expected decline in fiscal support through the end of next year and a more delayed recovery in consumer spending than previously expected.

The bank had earlier expected 5.7 per cent growth in 2021 and 4.4 per cent in 2022.

Mr Wu said the Singapore dollar may rebound to 1.3675 to one US dollar in March 2022 and further up to 1.3226 by September.

Singapore has announced an expansion of the Vaccinated Travel Lane scheme to nine other countries, including the US and Britain. ST PHOTO: DESMOND WEE

The trajectory is similar for the Malaysian currency as well.

One Singapore dollar last Thursday bought 3.0805 ringgit. According to OCBC, that amount will shrink to 3.0672 in December and to 3.0402 in March, before yielding a higher 3.0993 ringgit in September 2022.

"As it stands, we are not looking for much advantage for the Singapore dollar in terms of exchange rates," Mr Wu said.

However, the Monetary Authority of Singapore's (MAS) monetary policy statement on Thursday can change these forecasts.

While the market consensus is in favour of the MAS keeping its easing bias for the local dollar, some analysts - such as DBS Bank senior FX strategist Philip Wee - believe the MAS may opt to normalise the policy, which would mean seeking gradual appreciation.

"Although Singapore is learning to live with the pandemic, there is no reason to do the same with inflation," Mr Wee said.

Like elsewhere, consumer price inflation has been firming up in Singapore too, rising at an annual pace of 2.4 per cent to 2.5 per cent since May. It has also averaged 1.8 per cent in the first eight months versus the MAS inflation forecast of 1 per cent to 2 per cent.

Any sign of the MAS leaning hawkish could see the market bid up the local dollar against key currencies such as the US dollar, the euro and the ringgit.

Mr Chia of UOB said that even if the MAS decides to keep monetary policy on hold, it may choose to give some positive comments on Singapore's economic recovery, which should contribute to the local dollar's relative strength.

"Singapore's economy is expected to be on a stronger footing than regional economies, and the VTL announcement will reinforce this. (Thus), the SGD is expected to exhibit relative strength against its Asian currency counterparts," he said.

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