The Singapore dollar fell to a 1-1/2-month low on Wednesday after data showed the economy sinking deeper into recession, reinforcing views the central bank will ease policy by allowing the currency to weaken. The Singapore dollar lost about 0.3 percent to 1.5120 per US dollar after data showed the economy shrank at a seasonally adjusted annualised pace of 16.9 percent in the fourth quarter of 2008.
But it later recovered to 1.5030 after the Monetary Authority of Singapore (MAS), the central bank, ruled out an imminent move to let the currency weaken. "Investors cut their long US dollar positions after the MAS comment," said a trader in Singapore.
The data prompted the government to downgrade its 2009 growth forecast, just three weeks after it made its previous forecast. It now expects 2009 gross domestic product to fall between 2 percent and 5 percent, shifting down from a range of minus 2 and plus 1 percent, and it forecast deflation with consumer prices ranging between a fall of 1 percent and zero..
"The numbers were worse than the market median out there and should put a good bid on the US dollar versus Singapore dollar," says OCBC Bank currency strategist Emmanuel Ng. But the MAS said that its policy of zero appreciation for the currency announced last October remained intact and it had no plans to review its stance ahead of a scheduled meeting in April.
Still, analysts expect the central bank, which steers monetary policy by managing the currency within a undisclosed trade-weighted band against a basket of currencies, to shift the centre of the currency trading band downwards in April.
"The latest official forecast strengthened the case for a Singapore dollar's NEER re-centering, but there's still some room left for the Singapore dollar to weaken without the need to change the policy parameters," said Han Sia Yeo, currency strategist at Bank of America.
The Singapore dollar has lost about 5 percent against the US dollar so far this month, making it the second worst performing currency after the South Korean won. But Ng at OCBC Bank reckoned that the Singapore dollar's nominal effective exchange rate (NEER), had already hit the weaker end of its trading band.
Meanwhile, most Asian currencies moved in thin ranges early on Wednesday - a day after they were sold off due to concerns about gloomy global economic outlook and financial sector woes. The Indonesian rupiah fell moderately to 11,250 per dollar but traders expected it to receive some support later in the day as foreign funds flow into the country to buy local debt. "Some fund inflows to buy SBI (central bank debt) are expected today," said a trader in Jakarta.