IT'S STILL THE U.S. DOLLAR FOR NOW: Beware of greater volatility in forex markets

Singapore investors who are exposed to foreign currencies have been warned to be careful, given current foreign exchange market volatility.

ABN Amro's senior foreign exchange strategist, Mr Roy Teo, told The Sunday Times that the Singdollar is expected to outperform other currencies such as the Australian dollar, euro and the yen this year.

"Hedging could be essential" for investors exposed to currencies other than the US dollar. Hedging refers to a contract ensuring a fixed exchange rate.

He said an imminent hike in the benchmark US interest rate would tend to cause most currencies to depreciate against the greenback.

This is especially true for currencies such as the Japanese yen and the euro because both the Bank of Japan and the European Central Bank (ECB) are adopting monetary easing, as opposed to the tightening in the United States.

For years, the US has pumped money into its economy to get it going after the global financial crisis. Now that the economy is coming back to life, it is moving to tighten monetary policy by lifting interest rates.

Also, now the European Union and Japan, among others, are using looser monetary policy to try to kick-start their economies.

China is also affected. Mr Teo said the mainland's slowing growth as well as a lower-

than-targeted inflation rate meant that China had to stimulate growth.

"The People's Bank of China needs to allow a weaker currency to stimulate exports and push up inflation."

Even countries that are tightening monetary policy might suffer from a depreciating currency against the US dollar. For instance, Mr Teo predicts that Britain's pound will depreciate against the greenback.

While the Bank of England is expected to raise interest rates, he said it would be "less hawkish" than the Federal Reserve. The pound will thus depreciate against the US dollar.

But some currencies might recover in the long run.

Mr Teo expects the euro to recover next year because the "weaker euro, lower oil prices and the ECB monetary stimulus... will support the economic growth in the euro zone".

The strengthening US dollar might also benefit Asian economies and help offset the negative effects of a slowing China, he said.

"The slowing China also particularly affects South Korea, Singapore and Taiwan, where exports to China form a large proportion of gross domestic product.

"But the US recovery, as well as imminent euro zone recovery and possible stabilisation of the Chinese GDP, will support global growth and benefit Asian economies."

But for the moment, Mr Teo advises those planning to travel to the United States to convert their Singapore dollars into US dollars now.

Home owners holding mortgages based on floating interest rates like the three-month Sibor rate - which could change with the US rate hike - might be affected as well, he said. - Asiaone