Impact of MAS Policy Shift and US Tariffs on SGD

The Singapore dollar (SGD) has found itself under considerable strain, now sitting near a two-year low against the US dollar (USD). This decline reflects a broader trend of weakening currencies across Asia, driven by a combination of domestic economic adjustments and global trade dynamics. Investors are bracing for more currency depreciation as they anticipate the Monetary Authority of Singapore (MAS) to shift its monetary policy stance in response to evolving economic conditions. In particular, analysts are forecasting that the MAS may soon ease its current policy settings, a move that would likely exacerbate the currency's weakness. As economic uncertainty mounts and tariffs imposed by the United States continue to ripple across global markets, the future of the SGD is at the mercy of both local policy shifts and international developments.

Singapore is one of the most vulnerable economies in Southeast Asia to the effects of US tariff hikes, particularly under the looming threat of a potential re-election of former President Donald Trump. As the US continues to implement protectionist trade policies, ASEAN countries, including Singapore, have been bearing the brunt of the fallout. The trade war between the US and China, in which Singapore has an integral role as an intermediary and trade partner, has complicated the economic landscape. According to Lloyd Chan, a currency strategist at MUFG Bank in Singapore, these tariff hikes are particularly damaging to Singapore's trade-heavy economy, which relies heavily on imports and exports to maintain growth.

The Monetary Authority of Singapore (MAS) is unique in its approach to monetary policy. Unlike many other central banks, the MAS does not rely on traditional interest rate changes to manage economic activity. Instead, it uses the nominal effective exchange rate (S$NEER) to influence the pace of currency appreciation or depreciation. This system allows the MAS to adjust the currency band within which the Singapore dollar is allowed to fluctuate, with a focus on maintaining price stability. However, after more than a year of maintaining the same parameters for the S$NEER, a shift in policy is widely anticipated due to the evolving economic conditions in Singapore.

Over the past few months, the Singapore dollar has lost significant ground against the US dollar, slipping from its peak of 1.2789 per US dollar in September 2024 to around 1.37 per US dollar. This steady decline has been driven by a combination of factors, including the strength of the US dollar, rising US yields, and ongoing concerns over the impact of US tariffs. Analysts predict that the Singapore dollar will continue its descent, with several forecasts suggesting that it could slip to as low as 1.40 against the US dollar within the next year.

While the predicted drop in the Singapore dollar is relatively modest, it could still have significant implications for investors in the country’s debt market. In 2024, sales of local-currency corporate bonds reached an all-time high of S$31.2 billion, with foreign borrowers accounting for about one-third of the total deal volume. As the SGD weakens, these bonds will yield lower returns for foreign investors, reducing their appetite for Singaporean debt. This shift in investor sentiment could have far-reaching consequences for the broader economy, as reduced foreign investment in debt markets may lead to higher borrowing costs for local companies and the government.

Looking ahead, the economic outlook for Singapore is closely tied to both domestic policy shifts and broader global developments. The ongoing trade tensions between the US and China remain a key source of uncertainty, and Singapore’s role as a global financial hub and trading hub means that it is highly susceptible to shifts in global trade policy. Analysts will be closely watching the US presidential race, as a potential return of Donald Trump could lead to the re-imposition of tariffs on Chinese goods, which would disproportionately affect Singapore’s trade sector.

In conclusion, the Singapore dollar is facing a challenging road ahead, driven by a combination of domestic policy adjustments and global economic forces. The weakening of the SGD is likely to persist as the MAS pivots towards easing, while ongoing US tariff policies continue to disrupt the global economy. Although the predicted decline in the Singapore dollar may not be dramatic in the short term, it is clear that the currency's outlook is shaped by complex factors that require careful monitoring. Businesses, investors, and policymakers will need to navigate these uncertainties with caution, as the future of the Singapore dollar remains tightly intertwined with both domestic and international economic developments.