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Stubbornly strong Singapore dollar signals new inflation battle

Singapore's dollar is approaching the upper boundary of its trading band as speculation mounts that the central bank will boost the exchange rate for a second time this year to combat inflation.

[SINGAPORE] Singapore's dollar is approaching the upper boundary of its trading band as speculation mounts that the central bank will boost the exchange rate for a second time this year to combat inflation.

The currency last week reached a record high against a basket of major trading partners' currencies, based on HSBC Holdings' model of the Monetary Authority of Singapore's managed float system. The local dollar has continued to hover in the upper half of the band even after the central bank shifted to a strengthening bias in April.

Core consumer prices rose at the fastest pace in four years in July, increasing pressure on the central bank to act again. The MAS controls inflation by managing the exchange-rate: a stronger Singapore dollar lowers the cost of imported goods and vice versa. In April, it shifted from a neutral stance to seek a "slightly" faster appreciation of the local dollar.

Analysts estimated the move amounted to a gain in the currency of about half a per cent per year.

"The latest round of core inflation prints continue to be firm," said Terence Wu, an economist at Oversea-Chinese Banking Corp in Singapore. "It may add to further speculation for another round of policy tightening by the MAS in October."

Core inflation accelerated to 1.9 per cent in July, the fastest pace since 2014. The MAS projected the measure will be in the upper half of its 1 per cent to 2 per cent forecast this year.

"The currency market has started to price in tightening," said Toru Nishihama, an emerging-market economist at Dai-ichi Life Research Institute Inc. "I see the Singapore dollar weakening to around 1.39 by the year-end, but the decline could be slower if the MAS tightens."

The Singapore dollar traded at 1.3634 against the US currency as at 9:34am local time.

As the US exits its easy monetary policy with rate increases, emerging markets such as India, Indonesia, the Philippines and Malaysia have been buffeted by capital outflows this year. The rout has spurred Asian central banks to boost benchmark rates to defend against the selloff in their currencies and bond markets.

"As Asia's financial center, Singapore can't remain disconnected from the rising pressure of capital outflows from emerging economies,'' said Nishihama of Dai-ichi Life Research. That's another factor that may prompt a policy tightening by the MAS, he said.

Not everyone's convinced the central bank will tighten policy at its next review. Year-to-date core inflation has averaged 1.6 per cent, comfortably within its forecast range. Furthermore, economic growth slowed to 3.9 per cent in the second quarter from 4.5 per cent in the previous period, and the government expects further moderation in the second half.

"The recent June-July core inflation prints appear to be meeting MAS's expectations," said Marcus Wong, strategist at CIMB Bank Bhd's treasury department in Singapore. "We reiterate our call for the MAS to maintain monetary policy at its October meeting."

At the same time, Singapore's open economy is faced with the challenges of an escalating trade war between two of its largest trading partners.

Mid-level trade talks between US and Chinese officials ended last week with little progress as both countries imposed even more tariffs on each other. The central bank will need to juggle the sustained pressure from core inflation against the economic impact of a worsening US-China trade war. Both factors were cited by the central bank in its April policy review.

"Our core scenario is for a further, but very mild tightening at the October meeting," said Frances Cheung, head of macro strategy for Asia at Westpac Banking Corp in Singapore. "Trade remains the swing factor."


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