SINGAPORE, Apr 11 (Reuters) The Singapore dollar suffered a setback on Tuesday after the central bank opted not to tighten monetary policy, but a strong economic outlook is expected to send the currency higher again soon.
''Short-term, there will be some disappointment, but then people will start to buy the Sing dollar again,'' said Callum Henderson, head of currency strategy at Standard Chartered Bank.
''There is a very strong economic story. It has been focused on the external side, with a current account surplus of about 30 percent of GDP, but there is also a pick-up in domestic demand, suggesting more balanced growth going forward.'' In the first quarter of 2006, Singapore home prices notched up their biggest increase since the first quarter of 2000. More than 35,000 jobs were created in the last quarter of 2005, the biggest increase since 1997.
The Monetary Authority of Singapore (MAS), which conducts monetary policy through the currency rather than interest rates, stuck to a two-year-old policy stance of a ''modest, gradual appreciation'' in the Singapore dollar to curb inflation.
Economists had expected a change in the undisclosed, trade-weighted band within which the MAS allows the Sing dollar to trade, which would give the currency scope for more gains.
The Singapore dollar fell to 1.6147 per U.S. dollar after the MAS statement before recovering to 1.6115 by 0840 GMT.
Some long-term forecasts call for the Singapore dollar to climb to 1.50 within a year. More immediately it could retest the psychological 1.60 level, analysts said, due to optimism about the economy and speculation that China will allow the yuan to rise faster.
Analysts said the currency had probably been trading at the strong end of the trade-weighted band until Tuesday's sell-off.
Henderson estimated that this limit was currently around $1.60 and he expected it to be tested again before long.
''The middle of the band by our estimates is about 1.6240 in U.S.
dollar/Sing dollar terms. We might get a retracement towards somewhere around 1.62, but in the medium term people are likely to come back in and buy it again,'' he said.
Last week the Singapore dollar hit 1.6020 per U.S. dollar, its strongest level since June 1998. It has risen more than three percent this year.
ALREADY TIGHTENED? Some analysts said gains since the start of the year suggested the MAS had already widened its band for the currency and so implemented a tighter monetary policy.
''There is a shift. But the change is very, very subtle,'' said Philip Wee, a currency strategist at DBS Bank. He estimated the new band's width at 2.5 percent, with the current midpoint centred around 1.6290 per U.S. dollar.
Other analysts said the MAS wanted a strong currency, but not too strong.
''The MAS is trying to engineer a situation where the Sing dollar remains strong relative to the existing band, but not give a green light for it to keep strengthening in the dramatic way that it has done recently,'' said ABN AMRO Bank currency strategist Shahab Jalinoos.
He expects the Singapore dollar to strengthen to 1.58 per U.S.
dollar within three months and to 1.55 in 12 months.
Jalinoos added that short-term interest rates in Singapore had also risen.
''One of the rationales the MAS gave for not moving on the currency side is that rates domestically have gone up quite a lot.
What they are saying is that if that happens, they won't change the band, but they are not arguing against it happening,'' he said.
Further strong economic performance could spark speculation of a tighter monetary policy later this year, analysts said.
''We maintain our 12-month U.S. dollar/Singapore dollar 1.50 forecast, based on the view that the MAS will move to a tighter stance at the October meeting,'' analysts at Goldman Sachs said in a research note.
REUTERS CS PM1449