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Strong currency matters during inflation

By Wong Kon How

Why? Because of imports of essential goods. A stronger currency meaning a better buying power whoever you are importing from. Let’s see who is staying on the top since the pandemic started in 2020.

As exchange rates are priced on different sides, therefore it can be confusing. Following is an example of Singapore dollar versus its importing partners.

The Singapore central bank has a different strategy to manage inflation. Unlike most central banks that manage monetary policy through the interest rate, the Monetary Authority of Singapore or MAS uses the exchange rate or currency intervention as its main policy tool.

It lets the exchange rate float within an unspecified policy band, and changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the Singapore dollar.

The countries you import the most, it is vital to keep your currency strong. For example based on 2020 imports, Singapore import the most from:

1. China $47.37B 2. Malaysia $41.71B 3. U.S. $35.15B 4. Japan $18.11B

From the chart, we could see Singapore has an advantage over Ringgit, USD and Yen. However, we have to pay more for China’s imports. Overall, it is still pretty balanced.

The problem starts when the top importing countries, we have to exchange more of our home currencies for the imports, inflation bites deep. Strength of a currency takes decades to build compared to interest rate hike; a decision.

The strongest currency around should be able to weather more forthcoming inflationary pressure.

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