The Singapore dollar rallied on Tuesday, leading gains in Asian currencies, after the central bank surprised markets by holding monetary policy steady and expressed confidence in the trade-reliant economy's growth outlook. South Korea's won turned higher, tracking the Singapore peer, and extended gains on demand from exporters.
The Monetary Authority of Singapore (MAS) said it would maintain a modest and gradual appreciation of the Singapore dollar's nominal effective exchange rate (NEER), defying expectations it might loosen policy.
The Singapore dollar strengthened to 1.3597 per US dollar after the central bank's move prompted investors to cut bearish bets on the currency. Before the decision, the Singapore dollar was down at 1.3746, compared with its previous close of 1.3714.
The benchmark three-month interest rate, which is used to set the floating-rate mortgage, fell to 1.01441, the lowest since March 30. The rate has been rising this year on the back of a weaker Singapore dollar.
"The statement is a bit hawkish in my view. The MAS is still worried about future incipient medium term inflationary pressures and the growth outlook is not so dire," said Saktiandi Supaat, head of FX research for Maybank in Singapore.
The city-state's economy grew 1.1 percent in the first quarter on an annualised and seasonally adjusted basis, beating a market forecast of 0.5 percent growth in a Reuters' poll.
The MAS manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its NEER.
Despite its latest policy statement, analysts do not see sustained strength in the currency, especially as the US Federal Reserve is seen raising interest rates later this year.
"We continue to expect the SGD to weaken against the USD, heading into the anticipated Fed rate hike in September," said Heng Koon How, Credit Suisse Private Bank's senior currency strategist.
"We are maintaining our three-month forecast of 1.40, followed by 12-month forecast of 1.43."
The US dollar on Monday rose to its highest since March 16 against a basket of six major currencies on expectations of the Fed starting its tightening cycle this year.
Some analysts including Jonathan Cavenagh, senior FX strategist with Westpac in Singapore, expect the MAS to ease policy at the next review in October due to muted core price pressures and soft domestic demand.
"This leaves us still inclined to buy USD/SGD dips and we suspect the SGD NEER will continue to trade comfortably below the mid-point of the band. Look to buy dips back to 1.3600 and 1.3550." The won started the day weaker on the greenback's overnight strength.
The South Korean currency reversed the slide as the Singapore central bank's decision prompted stop-loss selling in the US dollar, traders said.
Local exporters bought the won for settlements on dips.
Foreign investors continued to add Seoul shares, and are set to become net buyers for a sixth consecutive session.
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