CONCERNS over the euro zone debt crisis and the upcoming Greek elections will weaken the Singapore dollar significantly against the greenback, according to economists.
The dollar traded at around $1.2745 to the United States dollar late yesterday, and is tipped to depreciate to $1.35 in the near future and be at around $1.30 by the end of the year.
MUTED EXTERNAL ENVIRONMENT
Unlike previous recoveries, where manufacturing played an important role... Singapore's gross domestic product growth this year will be driven by domestic and regional-oriented industries instead.
- The Monetary Authority of Singapore, in a note yesterday
'The Singdollar is again feeling the heat from the turmoil engulfing the euro zone,' said UOB Economic-Treasury Research in a note on Wednesday, pointing to renewed risk aversion and nervy investors seeking safety in the US dollar.
After hitting $1.2362 against the US dollar on May 2, the Singdollar depreciated 5 per cent to $1.2972 against the US dollar last Friday, UOB noted.
It is likely to weaken further if the Greek elections on June 17 deal another blow to the beleaguered euro zone.
UOB expects the Singdollar to 'weaken further to $1.35 (against the US dollar) in the immediate aftermath of a Greek tragedy' but strengthen to $1.30 in the fourth quarter of the year.
Most analysts echoed this prediction, adding that they expected the euro to decline further and volatility to continue.
The Singdollar strengthened to $1.59 against the euro last week, the strongest it has been in 10 years. Maybank's head of forex research Saktiandi Supaat told The Straits Times: 'My view is that there will be further declines in the euro.'
He said he had previously expected the Singdollar to end the year at $1.29 against the greenback, but was now revising that 'possibly towards $1.32 to $1.33'.
'I think over the next few weeks, things will get a bit more volatile... we think this volatility will last at least till end-June.'
Manufacturers cheered the weakening of the Singdollar, as a weaker currency makes the country's exports cheaper.
Dr Moh Chong Tau, deputy president of the Singapore Manufacturers' Association, said: 'If (the exchange rate) is stable at around $1.30 that'll be an ideal situation... As long as the currency settles within that region it'll be fine.'
But despite the exchange rate volatility, currency hedging requires funds, and not many small and medium-sized manufacturers have enough cash flow or familiarity with such tools, Dr Moh noted.
The Monetary Authority of Singapore said in a note yesterday that Singapore's growth prospects were 'likely to remain modest against a muted external environment'.
'Unlike previous recoveries, where manufacturing played an important role... Singapore's gross domestic product growth this year will be driven by domestic and regional-oriented industries instead,' it added.
While the weakening of the Singdollar might lead to worries over imported items becoming more expensive, Bank of America Merrill Lynch economist Chua Hak Bin said he expected that it would only have a fairly limited effect on imported inflation.
He noted that the Singdollar 'has weakened a lot more against the US dollar than it has against the trade-weighted basket (of currencies)'.
'It (the Singdollar) has strengthened against the euro and other Asian currencies, which have weakened a lot more.'
About 60 per cent of Singapore's inflation is imported, according to Dr Chua.
He expects the Singdollar to strengthen, to end the year closer to $1.21 to $1.22 against the greenback if the US Federal Reserve conducts a third round of quantitative easing later this year.