Singapore Dollar Weakness Poised to Continue Amid Easing Expectations and US Trade Impact

As concerns mount over the Monetary Authority of Singapore (MAS) shifting to an easing bias and the potential ripple effects of US tariffs on the global economy, the Singapore dollar is anticipated to maintain its weakness.

Market Outlook

The Singapore dollar has already approached a two-year low against the US dollar, and options market data suggests that bearish bets are dominating in anticipation of the MAS adjusting its stance. A Bloomberg survey indicates that a majority of economists anticipate a shift at the institution's upcoming decision on January 24th. Others foresee a move later in 2025, providing more time to assess the impact of Donald Trump's presidency.

"The MAS will focus on downside growth risks in 2025, particularly in light of potentially protectionist US trade policy," said Jennifer Kusuma, a senior rates strategist at ANZ Group Holdings Ltd. "With core inflation expected to remain below its long-term average, the MAS has room to make a pre-emptive move to reduce the restrictiveness of current policy settings."

Regional Currency Trends

Across Asia, currencies have fallen to multiyear lows against the dollar as investors anticipate inflationary pressures from US tariffs and reduce expectations for further Federal Reserve easing. The Singapore dollar reached a ten-year high of 1.2789 against the greenback just four months ago but has since weakened steadily to around 1.37 per dollar.

MAS Policy

While the parameters of the MAS's currency band have remained unchanged for over a year, easing price pressures in Singapore have created an opportunity for a policy shift. Core inflation, excluding housing and private transportation costs, has declined. Although the MAS does not have an explicit inflation target, it considers a level close to 2%, near its historical mean, to be consistent with price stability.

Analysts' Predictions

Analysts predict that the central bank will ease policy this month by slightly altering the slope of the currency band. Oversea-Chinese Banking Corp. and BNP Paribas SA also anticipate a January pivot. BNP Paribas forecasts a currency decline to 1.40 over the next year.

The MAS utilizes the Singapore dollar's nominal effective exchange rate (S$NEER) as its primary monetary policy tool instead of interest rates. It permits the currency to move within a band, adjusting the slope, center, or width as necessary to influence the pace of appreciation or depreciation. The entity does not disclose details about the basket, band, or pace, only indicating when they have changed.

Market Impact

DBS Group Holdings estimates that the currency has already reached the midpoint of the MAS's band and projects a decline to 1.39 by midyear. Goldman Sachs Group Inc. forecasts 1.38 within six months, while MUFG and Malayan Banking Bhd. anticipate reaching that mark in the first quarter. Barclays Plc predicts the MAS will adjust S$NEER this month, causing the Singapore dollar to reach 1.39 by year-end, according to strategist Lemon Zhang.

The anticipated currency decline, albeit modest, could reduce returns for investors in Singapore's debt market, where sales of local-currency corporate bonds reached an annual record of S$31.2 billion ($22.9 billion) last year. Foreign borrowers accounted for approximately one-third of the transaction volume in 2024, according to Bloomberg data.

US Trade Policy Considerations

US trade policy remains a significant concern for Singapore and its central bank, as noted by MAS Managing Director Chia Der Jiun in November. China, a major trading partner for Singapore, was estimated by Barclays in September to account for approximately 10% of the MAS currency basket. DBS expects the MAS to postpone reducing the policy band slope until April.

"The dollar-Singapore dollar cross should rise to 1.39 in the second quarter due to the Fed's cautious rate cut stance and Trump's upcoming tariffs on Singapore's trading partners," said DBS strategist Philip Wee.