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Business Times - 28 Jul 2011

Not even S$1.20? US dollar shrinks to new lows

Stalemate over debt ceiling hurting greenback; concerns arise over strong S$


(SINGAPORE) The US dollar slid further yesterday, breaking the psychologically key level of S$1.20 to hit S$1.1992 in morning trade, as it continued to suffer from the political gridlock over the US debt ceiling.

By 7pm, it had recovered to S$1.2021, but that was still a new year-low, according to Bloomberg data.

In the region, the greenback also fell to fresh troughs. One dollar bought 2.9493 Malaysian ringgit compared with over three ringgit just more than a week ago. Against the Indonesian rupiah, it cracked the 8,500 level to reach 8,484.

Safe haven currencies gained too as investors sought refuge in them. One dollar was worth just 0.8007 Swiss franc and 77.77 Japanese yen.

The US dollar's weakness surprised few, given the lack of any breakthrough in discussions between Democrats and Republicans when it comes to raising the US$14.3 trillion debt ceiling.

The Democrats are proposing cuts in government spending and an end to tax breaks and special deductions for the richest Americans and corporations; the Republicans are focusing mainly on spending cuts.

US President Barack Obama and Republican Speaker of the House of Representatives John Boehner both made televised speeches on Monday night to defend their proposals, but that only underscored the deep divide between the opposing parties.

Plans on the table may not even survive scrutiny. The Congressional Budget Office found yesterday that both parties' proposals would not reduce spending by the amounts expected. Mr Boehner was forced to postpone a vote on his measure.

'The US dollar is bearing the brunt of the US debt battle, particularly after few signs of conciliation between the parties involved,' said Bank of America Merrill Lynch analysts in a note yesterday. 'We believe either solution may only be successful in implementing front-loaded spending cuts and may fail to prevent a downgrade,' they said, adding that ratings action would be negative for the US dollar.

While worries over the US government's ability to make upcoming interest payments have reigned, concerns about the strong Singapore dollar have surfaced closer to home. A rising Sing dollar makes Singapore's exports less cost competitive, though it helps to curb inflation by making imports cheaper.

'A combination of exchange rate appreciation and rising relative price levels are raising the risk that cost competitiveness is being eroded,' said Citi economist Kit Wei Zheng in a report on Tuesday.

But with the business cycle still in the expansion stage, and considering moderate growth and inflation in the country, 'this is arguably a deliberate choice of policy to lean against the wind', he added.

The government expects Singapore's GDP to grow by 5-7 per cent this year - a decent range - though that is now under review. Meanwhile, the official forecast for inflation this year has crept up to 4-5 per cent, from 3-4 per cent earlier.

Credit Suisse economist Wu Kun Lung pointed out that the Sing dollar's appreciation has been gradual and the impact 'should be manageable'. Meanwhile, other regional currencies have also strengthened against the US dollar, so the relative impact of the Sing dollar's rise may not be as big as it seems, he said.

It is not just exports that the market has its eyes on. CIMB research head Kenneth Ng said that another thing to watch is how the rising Sing dollar would affect the cost of doing business in Singapore versus Hong Kong, from multinational companies' point of view.

Will we see parity during our life time?
I think we will.

Once upon a time, I remember 1 UK pound = 5 SGD, and 1 USD = 2 SGD.

It sure is reassuring that SGD is not depreciating. Allows me to have more options when I consider retiring overseas in my twilight years. In the past, UK and US citizens can have their pick of retirement countries due to their strong currency.

Now it's our turn!

Having said that, I am bleeding like hell over the euro... I only hedged 50% of my pay in euros Sad