Expected Time Lag for Sing Dollar Policy Adjustments to Have Visible Effect on Exchange Rates

Mr Yip Hon Weng asked the Prime Minister and Minister for Finance regarding the recent strengthening of the Singapore Dollar (a) what is the expected time lag for this adjustment to have a visible effect on exchange rates; (b) what is the effect of global shifts away from the US Dollar on the S$ Nominal Effective Exchange Rate (S$NEER) index basket's currency weighting; and (c) how do these changes impact the Singapore Dollar's stability over time.

Sir, the Monetary Authority of Singapore (MAS) conducts monetary policy by managing the Singapore dollar nominal effective exchange rate (S$NEER). Since October 2021, the S$NEER has been on a gradual appreciating path against its trade-weighted basket of currencies. And this is consistent with the policy stance at each quarterly policy announcement. This strengthening trend will continue following the most recent April policy statement.

The United States (US) dollar continues to be the major currency used in international trade, including for most commodities, and the US is one of Singapore's largest trading partners. The diversified currency composition of the S$NEER basket reflects the pattern of Singapore's trade with its main import sources and export markets. These are structural factors that only evolve gradually over time. The weights in MAS' currency basket are periodically reviewed and updated to reflect Singapore's evolving trade patterns. No single currency dominates in the S$NEER basket or unduly affects the broad stability of the Singapore dollar against the basket.

Sir, the stability of the Singapore dollar is underpinned by the strong fundamentals of our economy, including sound macroeconomic management and a credible monetary policy framework that has delivered good inflation outcomes.

I thank the Minister of State for his reply. While the US dollar remains dominant, some economists have suggested that the global monetary system may gradually become more fragmented and multi-polar over time. Given that Singapore relies heavily on exports and use the exchange rate to manage inflation, could the Minister of State explain how such global currency shifts may affect the Government's ability to keep imported cost stable for Singaporeans, particularly in essentials, such as food, energy and daily necessities?

Sir, as I have always said in this House, when it comes to our monetary policy, it is always long term and its objective is to keep inflation low.

With regards to the US dollar, I know there have been many discussions regarding its role as an international currency, but if you look at the facts, the US dollar continues to remain the central currency in the international monetary and financial system and continues to be the world's dominant reserve currency.

If you take international trade and if you look at which currency is the invoicing currency, the US dollar, in fact, is used by many countries as the invoicing currency of international trade. In fact, many commodity prices, like oil and gold, are denominated and still are denominated in the US dollar. If you think about trade invoicing, most global trade is also invoiced in just a few currencies, like the US dollar, which accounts for about 40% of global exports, and the Euro, albeit to a much lesser extent. If you look at other currencies, despite some growth in, for example, the Renminbi's share in global trade invoicing, it remains very low, at less than 2%, although that is increasing in the Asia Pacific and in the European region.

So, if you think from a larger perspective, the US dollar continues to be dominant. Our monetary policy instrument, the S$NEER, is weighted against a basket of currencies of our major trading partners, and the Singapore dollar has been on an appreciating path since we tightened monetary policy in October 2021. The S$NEER has since increased by 12%. And that has the effect of dampening imported inflation in Singapore and a downstream impact on our economy.