Singapore Dollar Most Vulnerable to U.S. Rates: Chart of the Day

Singapore Dollar Most Vulnerable to U.S. Rates
Singapore ndollar-treasury yield correlation. Bloomberg Data

Singapore’s dollar has emerged as Asia’s most-vulnerable currency to prospects of higher U.S. interest rates, driving a gauge measuring the relationship to a record high.

The CHART OF THE DAY tracks the Singapore dollar and the benchmark U.S. 10-year yield since April 1995. The lower panel shows the 240-day correlation between the currency and Treasury rate climbed to about 0.4 last week, the highest in data going back to 1981. The link between the two is the strongest in Asia, excluding the Chinese and Japanese currencies, on a weekly basis, the data show. The Monetary Authority of Singapore, which manages the local dollar against an undisclosed basket of its peers, said today it will maintain a modest and gradual appreciation of the currency.

“As we progress into the second half of this year, and into 2015, a higher yield environment is something that will cap Singapore dollar strength for sure,” said Jonathan Cavenagh, a currency strategist in the island state at Westpac Banking Corp. “The market should be more confident that the U.S. economy is on a firmer footing by that stage.”

Singapore’s currency rallied 0.8 percent last week after the Federal Reserve, in minutes of its last meeting, played down predictions by some of its own policy makers that interest rates might rise faster than they had forecast earlier. Fed Chair Janet Yellen said in March that the central bank may start to increase borrowing costs “around six months” after concluding its asset-buying program, which economists forecast will end in October.

Even so, the U.S. benchmark yield will climb about 70 basis points to 3.33 percent by the year-end, outpacing a gain of about 40 basis points to 2.81 percent in Singapore, according to analyst estimates compiled by Bloomberg. The island state’s currency is projected to weaken 2.4 percent to S$1.28 per dollar by year-end from S$1.2495 as of 8:25 a.m. in Singapore.

“Singapore runs monetary policy via the exchange rate, so it is somewhat beholden to where interest rates in the U.S. ultimately go to,” said Westpac’s Cavenagh. “Over the longer term, that is certainly a risk to the Singapore dollar outlook.”

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