SINGAPORE: The Singapore dollar could continue to hold an edge over other Southeast Asian currencies, bolstered by its increasingly close relationship with China’s offshore yuan and supportive monetary policy settings.
An analysis by Bloomberg indicates that the Singapore dollar and the yuan have moved more closely together than any other pair of Asian currencies since the onset of the Middle East conflict. At the same time, the local currency has maintained a strong inverse relationship with the US dollar, a dynamic that has worked in its favour as the greenback weakens.
This trend is partly rooted in Singapore’s unique monetary framework. Unlike most central banks that rely on interest rates, the Monetary Authority of Singapore (MAS) manages policy through the exchange rate, guiding the currency against a basket of trading partners within an undisclosed band.
The yuan plays a significant role in this basket, with Bloomberg Intelligence estimating its weighting at 11.9%, the second largest component.
Khoon Goh, head of Asia research at ANZ, told Bloomberg that the yuan’s influence on the Singapore dollar stems from its substantial weight in the nominal effective exchange rate basket. He added that the MAS’s recent policy tightening, particularly a steeper appreciation path for the currency, could support further gains. Singapore’s reputation as a safe haven is also expected to underpin demand.
Although the Singapore dollar has slipped by about 0.4% since the Iran conflict began, it has still outperformed regional counterparts such as the Malaysian ringgit and the Philippine peso.
Recent data highlights the strengthening link between the Singapore dollar and the yuan. The 30-day correlation between the two has climbed to 0.90, up from roughly 0.6 at the end of February. Meanwhile, its correlation with the Bloomberg Dollar Spot Index stands at minus 0.94, the most negative among emerging Asian currencies.
With the dollar index already down nearly 2% this month amid hopes of easing geopolitical tensions, further weakness in the US currency could provide additional support to the Singapore dollar.
Maybank strategists, including Saktiandi Supaat, said in a note that a softer greenback and the possibility of further MAS tightening in July may lift Singapore’s nominal effective exchange rate. The bank expects the local currency to strengthen to 1.26 against the US dollar by the end of the year.
