Singapore Dollar to Reach 27-Year High on MAS Policy, UBS Says

By Lilian Karunungan and David Yong

Jan. 17 (Bloomberg) -- The Singapore dollar will gain to the strongest in at least 27 years in 2008 as the central bank curbs inflation and investors seek to profit from the city-state's economic growth, according to UBS AG.

The currency will climb 4.2 percent this year to S$1.38 against the U.S. dollar, UBS, the world's second-biggest trader of foreign exchange, forecast in a research report. Singapore's dollar has advanced 2.8 percent since the central bank said in its semi-annual review on Oct. 10 that it would allow ``slightly'' faster appreciation in the currency.

Singapore's inflation reached the highest in 25 years in November as prices of food, housing and transportation costs rose. Fixed-asset investment in Southeast Asia's fourth-largest economy reached a record last year as property developers built new office towers and condominiums and companies such as Exxon Mobil Corp. set up new factories.

Asia's domestic-driven growth stories such as Singapore's will lure global investors to safer assets and boost fund inflows, Chiou Yi Chang, a UBS economist based in Singapore, said in an interview yesterday. ``Expectations of currency appreciation have further incurred strong money inflows.''

The local dollar traded at S$1.4309 against the U.S. currency as of 1 p.m. in Singapore, according to data compiled by Bloomberg. It reached S$1.4263 on Jan. 11, the highest since June 1997. The currency has risen 0.5 percent this year, adding to a 6.7 percent advance in 2007.

Inflation Context

The Monetary Authority of Singapore uses the exchange rate instead of interest rates to guide monetary policy, allowing the local dollar to move within an undisclosed band against a basket of currencies of the island's biggest trading partners.

``In the current context of high inflation, we would be expecting the exchange rate to remain at the top of the policy band until mid-2008,'' UBS said in a Jan. 15 research report.

Singapore's dollar rose 3.4 percent in the three months ended December, the best quarterly gain of 2007, and the second- fastest pace among Southeast Asian currencies following the October MAS review. Only the Philippine peso did better.

The central bank seeks to prevent the dollar from rising or falling outside of the band, raising speculation the MAS buys and sells its currency to control the exchange rate. The currency gained 2.6 percent in October, before slowing to 0.2 percent and 0.6 percent in November and December, respectively.

Singapore has almost $163 billion in foreign-exchange reserves, the seventh-biggest in the Asia-Pacific region and the most among Southeast Asian countries.

Singapore's consumer price index rose 4.2 percent in November from a year earlier, versus 3.6 percent in October, the statistics department said on Dec. 24.

Inflation may accelerate to 5 percent in the first half, before averaging out at 3.5 percent for 2008, Chang said.