Last Wednesday, Singapore’s central bank was one of the latest to expand its monetary policy as a measure to reinforce growth in the economy. According to the NY Times, Singapore’s central bank decision was not expected. In an announcement before the scheduled policy meeting in April, the bank said it would slow the appreciation of the currency to the dollar within a targeted band mentioning recent developments in global and domestic environments.
The Singapore dollar operates under a managed float currency regime based on a basket of currency against the major trade currencies in the world and is allowed to trade within an undisclosed band. Adjusting its currency is one of the government’s main policy tools. The central bank said it would reduce the slope of Singapore’s dollar trading band while keeping the level and width of the centre of the band unchanged. According to the WSJ, the central bank is now expecting inflation to be around -0.5% to 0.5% this year compared to an earlier estimate of 0.5% to 1.5% announced in October.
Following the central bank’s decision, the currency dropped by 1.4% to 1.35 SGD against the US dollar, its lowest level in more than 4 years. Singapore becomes at least the ninth country to ease its monetary policy as global price pressures evaporate with an oil slump. Several other countries have shocked the markets by changing their policies. Central banks in Denmark, Canada, and India unexpectedly cut their interest rates this month, and Switzerland’s currency, the franc, is no longer pegged to the euro which led to a sudden currency appreciation of 30% against the euro. Finally, the European Central Bank announced its quantitative easing programme in order to pump money into the Eurozone. These global policy changes may have triggered Singapore’s central bank to take action. It may have led to a concern on the country’s exports both in goods and services as the global market has become more competitive due to the policies other countries have taken. Howie Lee, an investment analyst at Phillip Futures mentioned that this move is a massive boost for the export-oriented economy of Singapore; with a softer Singapore dollar, the country can now sell its goods and services more easily, and that another adjustment in April is unlikely.
With economies on the verge of deflation and slow growth, the natural response by central banks would be to weaken the currency to fight deflation and spur export driven growth. The currencies’ depreciation will drive up import prices and make domestic products more competitive when compared to foreign rivals. One cannot deny that there is a currency war going on as many countries changing their policies to increase their competitiveness in the global market. One depreciating currency means the other has to be appreciating, so if there are winners there are also losers. Mostly all currencies have been depreciating against the dollar. In other words, the dollar is appreciating. The United States healthy economy and the expected shift of the Federal Reserve to raise interest rates in mid summer has been drawing foreign capital to the US economy. The effect is being revealed as major multinational companies have seen the strong dollar decreasing their earnings and revenues.
One of the big questions now is how long it will take before the Chinese seek to devalue their own currency given signs that their economy is slowing and their trade partners, the Japanese and Europeans, have been devaluing.
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