April 15 (Bloomberg) -- The Singapore dollar may gain 8 percent by the end of 2011 as the central bank favors a stronger currency to cool inflationary pressures, according to UBS AG, the world’s second-largest foreign-exchange trader.
The currency rose to its highest level since August 2008 after the Monetary Authority of Singapore yesterday unexpectedly announced both a one-time revaluation and appreciation over the next six months. The central bank conducts monetary policy by guiding the Singapore dollar in an undisclosed band against trade-weighted currencies. Gross domestic product will expand as much as 9 percent in 2010, compared with a previous outlook for growth of 6.5 percent, the trade ministry forecast yesterday.
“The double-barrel monetary tightening was an uber- aggressive move,” said Nizam Idris, a strategist at UBS in Singapore. “It tells me that the economy is expected to do very well and there are concerns about long-term inflation and asset- price inflation, which argues for a much stronger currency.”
Singapore’s dollar climbed 0.2 percent to S$1.3744 against the greenback as of 3:13 p.m. local time. It has gained 2 percent so far this year, underperforming neighboring currencies such as Malaysia’s ringgit and Indonesia’s rupiah, which have strengthened 7 percent and 4 percent, respectively.
UBS forecast an exchange rate of S$1.35 by the year-end and S$1.27 by the end of 2011, compared with previous forecasts of S$1.38 and S$1.32 respectively. Before the MAS meeting, the median forecast in a Bloomberg survey of 13 analysts was for S$1.32 by the end of next year.
Trade-Weighted Band
The Monetary Authority of Singapore said yesterday it will seek a “modest and gradual appreciation” of the local dollar and shift to a stronger range for fluctuations, the first such combined move in its 39-year history. The central bank can by adjust the center, slope or width of the undisclosed band.
“Yesterday’s revaluation probably shifted the trade- weighted band up by 1.5 percent,” said Sean Callow, a strategist in Sydney at Westpac Banking Corp, citing his calculations of the model. “This is likely to be followed by another 2 percent to 3 percent rise in the trade-weighted basket over the next one year.”
Callow predicts around S$1.36 per dollar within the next month. He will revise the forecast higher if China allows gains in the yuan, pegged at about 6.8 to the dollar since July 2008.
United Overseas Bank Ltd., Singapore’s second-largest lender by market value and the only one of 13 surveyed by Bloomberg that predicted the central bank move, forecast the currency to end 2010 at S$1.33 to the greenback. Wells Fargo & Co. in New York, predicted a gain to S$1.33 in a report yesterday, without specifying a timeframe.
Singapore’s economy expanded an annualized 32.1 percent in the first quarter from the previous three months, the strongest since at least 1975. The government revised its inflation target for this year to between 2.5 percent and 3.5 percent, compared with an earlier projection of 2 percent to 3 percent.
Source: Singapore Dollar to Gain 8% by End-2011 on Inflation, UBS Says - BusinessWeek
--- E. Fermi (1901-1954)
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