MAS move could pre-empt peg changes

Potential peg changes in China and Malaysia could constitute nominal shocks, explained Chia Woon Khien, senior market strategist at DBS Bank in Singapore, and the policy change would reduce potential pressure on the Singapore dollar if it were already relatively stronger.

International pressure has been mounting over the past year for Asian central banks to allow their currencies’ values to be set by market forces. Some politicians in the US argue that currencies such as the renminbi are undervalued, putting US domestic industries at a disadvantage.

But other analysts remained sceptical that potential revaluations may be behind MAS’s policy change. "I don’t think anybody knows the timing of the yuan reval, so its something that’s very difficult for the central bank to factor in," said Irene Cheung, FX strategist at ABN Amro in Singapore. "It’s very much China’s own call."

Sameer Goel, regional strategist at Bank of America in Singapore, said China would probably only make gradual changes to its peg in the second half of 2004. Although there would be pressure on other Asian currencies, it would not be dramatic, he said.

However, analysts are agreed that MAS’s announcement would translate into a gentle strengthening of the Singapore dollar in the medium term. "Given its inflation outlook, the MAS is likely to be looking at a modest appreciation of around 2%," said ABN’s Cheung. "Although the Singapore dollar NEER (Nominal Effective Exchange Rate) is already trading close to the 2% line, the prospect of a stronger yen implies that US dollar/Singapore dollar could hit 1.64 by September 2004."

DBS’s Chia said the announcement would lead to a gradual appreciation of the currency. "In three months’ time, if the dollar weakens against the yen but stabilises with the euro, we could be below the 1.66 level in three months."

Bank of America’s Goel said he expects the Singapore dollar, which is currently around 1.68, to rise to 1.63 per US dollar by year-end.

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