The Singapore dollar has been a standout performer lately, rising to its highest point in nearly a decade. On Friday, the Singapore dollar hit its highest level against the U.S. dollar since 2014 and stabilized near $1.30 in early trading on Monday. The Singapore dollar has appreciated by about 1.5% so far this year, second only to the Malaysian ringgit among Asian currencies.

The Monetary Authority of Singapore has further enhanced the appeal of the Singapore dollar by appreciating the currency to curb inflation. Earlier, despite global economic uncertainty, the Singapore government raised its growth forecast for 2024 to between 2% and 3%, indicating that economic expansion will continue to support the appreciation trend of the Singapore dollar. This appreciation trend shows that the Singapore dollar's safe-haven status continues to improve amid global economic turmoil. However, the market remains cautious about future trends, especially under the influence of the Fed's policies.

Reasons for the surge in the Singapore dollar

The hawkish policy outlook of the Monetary Authority of Singapore (MAS) contrasts sharply with the dovish stance of the Federal Reserve, which together have contributed to the surge in the Singapore dollar. MAS maintained its monetary policy's appreciation bias at its July meeting to curb inflation, while an upward revision to Singapore's economic growth forecast further supported the SGD. MAS implements monetary policy primarily through exchange rate tools, allowing the SGD to fluctuate within a certain range.

Fed Chairman Powell's comments at the Jackson Hole Annual Meeting all but confirmed that the US will make an interest rate cut next month, an expectation that led to the dollar's decline. Powell stressed that the specific timing and pace of the interest rate cut will depend on future economic data and risk assessment.

SGD gains may be limited

The recent strong performance of the SGD has benefited from MAS's hawkish policy and positive economic growth forecast. Despite the depreciation pressure on the US dollar, the SGD's gains may be limited by its policy band.

Christopher Wong, foreign exchange strategist at OCBC Bank, pointed out that the US dollar continued to be under pressure against the SGD, and the market's confidence in selling the US dollar increased. However, he also warned that further short-term gains of the SGD against the US dollar may be limited as the Singapore dollar nominal effective exchange rate (S$NEER) trades on the strong side of its policy band.

International institutions such as OCBC Bank, HSBC, Goldman Sachs and J.P. Morgan have all given positive comments on the strong performance of the Singapore dollar. They believe that the performance of the Singapore dollar is not only supported by the hawkish policy of the MAS, but also reflects the market's positive expectations for Singapore's economic prospects.

Beware of a rebound in the US dollar

The US Federal Reserve's (Fed) interest rate cut in September is almost a foregone conclusion, and the high market expectations have driven the weak trend of the US dollar, which in turn prompted the Singapore dollar (SGD) to briefly fall below the 1.3 level against the US dollar on Monday, August 26, reaching a nearly 10-year high. However, analysts warned that if the actual rate cut by the Fed is less than market expectations, there may be room for the US dollar to rebound. In addition, the uncertainty of the US election results also poses potential risks to Asian currencies, including the SGD. If President Trump is re-elected, the uncertainty of his trade policy, especially the risk of increased tariffs, may put pressure on Asian currencies. Therefore, although the SGD is supported by the weak US dollar and expectations of rate cuts in the short term, investors should remain cautious and pay close attention to the Fed's policy moves and the progress of the US election to evaluate and adjust investment strategies in a timely manner to cope with possible market fluctuations.

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