S$ falls nearly 2% against US$ from August high after Yellen's speech

THE Singapore dollar fell to S$1.361 against the US dollar on Monday at 2.29pm, almost 2 per cent lower from the August high of S$1.338 following last Friday's highly anticipated speech from US Federal Reserve chairwoman Janet Yellen.

It wasn't just the SGD which fell, as most Asian currencies were also lower after Ms Yellen raised expectations of an interest rate hike next month following months of improving US economic data . "I believe the case for an increase in the federal funds rate has strengthened in recent months," Ms Yellen said last Friday.

At S$1.361, the local unit is back to a level not seen - albeit briefly - since July 25. But local interest rates continue to remain weak on abundant liquidity which is unusual.

"The SOR or swap offer rate tends to move higher when USD/SGD moves higher. The discrepancy now may be due to flush of local liquidity," said Roy Teo, ABN AMRO Bank's senior forex strategist.

The three-month Sibor which is used to price home loans was unchanged at 0.87191 per cent, a 12-month low. The three-month Sibor is now some 30 per cent lower than the year's high of 1.254 per cent on Jan 19.

The more volatile three-month SOR which is used to price commercial loans fell to 0.70780 on Friday from 0.75276 per cent the previous day.

Said DBS Bank economist Eugene Leow on the divergence of stronger USD and yet weak local interest rates: "Firstly, markets seem to be reacting to the prospect of an impending Fed hike quite well for now. It is unclear if this will last."

"Secondly, domestic liquidity is abundant and the market is anticipating S$7.7 billion worth of SGSs (Singapore Government Securities) to mature on Sept 1. These two points provide downward pressure on Sibors and SORs."

Both DBS and ABN AMRO expect the SGD to weaken in the coming months.

"DBS expects USD strength to be dominant in the coming months," said Mr Leow.

DBS and ABN AMRO have USD/SGD at S$1.40 by the end of the year.