AS expected, the Singapore dollar fell and local interest rates rose on Thursday following the interest rate hike by the US Federal Reserve.
The Fed raised the target range for its federal funds by 25 basis points to 0.5 per cent to 0.75 per cent during its Dec 14 meeting.
At 8.30am on Thursday, one US dollar was worth S$1.4432, up 1.4 per cent from its close on Wednesday of S$1.4237, said Reuters. It recovered somewhat later in the morning and stood at S$1.4370 at 11.58am.
The 3-month Singapore interbank offered rate (Sibor), typically used to price home loans, rose 3 points to 0.963 per cent. The 3-month SOR (swap offer rate) also rose 3 points to 0.851 per cent on Wednesday. The benchmark for commercial loans is updated late at night.
The USD is strong because of the strengthening US economy, said Philip Wee, DBS Bank senior currency strategist. He said that earlier USD rallies, from 2013-2015, were due to weakness in the yen and euro.
“The higher dollar is due to a strong US, not weak yen or euro,” he said.
DBS is forecasting four Fed hikes in 2017 and expects the SGD to weaken to S$1.48 by end-2017.
As for the rise in Sibor and SOR, he said to think of it as repricing as the market feels the Fed has only talked about the improving US economy.
The US is expected to grow 1.9 per cent in 2016 and 2.1 per cent in 2017.
“They have not factored in Mr Trump’s policies,” he said.
US president-elect Donald Trump is expected to introduce reflationary policies.
Victor Yong, United Overseas Bank interest rate strategist, said the SOR, which is more volatile, could rise faster due to capital flight fears from the region.
“In 2017, we expect to see SORs head progressively higher alongside a rising Fed funds rate. SORs could see episodes of sharper yield gains if regional currency depreciation pressures elevate to the point of capital flight fears.”
The market seems to have quickly adjusted to the shift in Fed policy, said Richard Jerram, chief economist, Bank of Singapore.
“But we worry that pressure could resume in 2017 when the new administration’s fiscal plans become clearer. If Mr Trump pushes for a big fiscal stimulus, as he has suggested, then the Fed is going to have to reassess its policy stance and could be forced to hike rates faster than it currently signals, which could send SGD down further against USD.”