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Singapore dollar rallies for the fourth day on safe haven appeal

THE Singapore dollar continued to rally on Tuesday as investors turned to safe haven assets following the latest North Korean provocation.

It surged to S$1.3515 from S$1.3545 on Monday, having risen four days in a row and is now up almost 7 per cent year-to-date.

According to news reports, North Korea fired a missile early on Tuesday that flew over Japan and landed in the Pacific about 1,180 km off Hokkaido. Japanese Prime Minister Shinzo Abe said that it was "a most serious and grave" threat. Reuters news agency described the test as one of the most provocative ever from the reclusive state, and CNN reported that South Korea responded by conducting a bombing drill to test its "capability to destroy the North Korean leadership".

North Korea has conducted dozens of ballistic missile tests under its leader Kim Jong Un - the most recent was on Saturday - but firing projectiles over mainland Japan is rare, said the Reuters report.

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Singapore dollar bonds touched new highs as investors turned away from risky assets.

The Markit SGD corporates' total-return index hit a new high of 123.3654, up 0.1730. The index has gained more than 5 per cent since the start of the year.

United Overseas Bank's head of markets strategy Heng Koon How said that the market swung into risk aversion, and investors returned to the embrace of safe haven assets such as gold, yen and US Treasuries. "As such, USD is broadly weaker and that led to SGD strength and firmer demand for SGS bonds as well," said Mr Heng.

Credit Suisse investment strategist Suresh Tantia said that the Singapore dollar rally is on the back of risk-off environment in the market after North Korea fired a ballistic missile over Japan.

"This added to the woes for USD bulls after Miss Yellen disappointed markets last week and did not provide any insights on the monetary policy outlook. Demand for safe haven assets is on the rise with bond yields across the board heading lower," he said.

Last week's meeting of central bankers - including Janet Yellen, chair of the US Federal Reserve - did not touch on monetary policy.

Singapore's 10 year bond yield fell by five basis points to 2.06 per cent, following the US treasuries, leading to higher bond prices, he said.

Tuesday's move in euro/US dollar above 1.20 level is also supporting Singapore dollar as the currency is managed against a basket of its trading partners, said Mr Tantia. The euro rose to its strongest level in more than two years.

"Undoubtedly, geopolitical risks remain heightened with uncertainty on North Korea's response to the ongoing annual military exercise between South Korea and the US, and any aggressive posture ahead of its National Day on Sept 9," he added. "However, we believe as long as a military conflict is averted, the negative impact of the North Korean crisis could be limited and bond yields could rebound."