Singapore dollar 'too strong' relative to external and domestic factors: DBS Group Research

DBS Group Research downgraded its Singapore dollar (SGD) forecast last Friday as its analysts said the currency was "too strong" relative to external and domestic factors.

In a research note, FX (forex) strategist Philip Wee and economist Radhika Rao said they now believe that that USD/SGD will rise to 1.40 by the end of this year and stay above that level into 2019.

According to DBS Group Research's model, the floor of the USD/SGD policy band was just above 1.38 on Tuesday morning, higher than the 1.3728 floor seen on Oct 12 when the SGD policy was tightened.

"Looking ahead, external and domestic factors suggest that the SGD should move away from the strongest limit towards the mid-point of its policy band, currently located just below 1.41 against the US dollar," the analysts wrote.

They said the USD is strong against currencies in the developed and emerging markets, thanks to factors such as rising US rates. In Asia, currencies such as the Thai baht and South Korean won have weakened to a low this year due to trade tensions between the US and China.

"Domestically, there are fewer fundamental reasons for the SGD to cling tightly to the strongest limit of its policy band," DBS added. The analysts pointed out that among other factors, CPI (consumer price index) inflation is within this year's forecast range of zero to 1 per cent, while there are no signs that core inflation will exceed the 1-2 per cent forecast range anytime soon.