SINGAPORE — The Singapore dollar surged its highest in three years against the US dollar on Thursday (Jan 25), after United States Treasury Secretary Steven Mnuchin said a weaker US dollar would help trade and benefit the US economy — comments which he subsequently tried to walk back by saying he spends little time thinking about dollar weakness over the short term.

As of 6.09pm, the Singapore dollar was trading at S$1.31 against the US dollar, according to Bloomberg data, the highest since it closed at S$1.3044 on Nov 28, 2014.

Mr Mnuchin’s initial remarks echoed what US President Donald Trump had said in January last year about the greenback being “too strong” which would eventually hurt the American economy.

For decades, US policy has touted the benefits of a strong US dollar. Referring to his earlier comments, Mr Mnuchin said during a panel discussion at the World Economic Forum in Davos, Switzerland: “There are benefits of where the dollar is and there are costs of where the dollar is… It’s not a shift in my position on the dollar at all. It is perhaps slightly different from previous Treasury secretaries. We do support free and floating currencies reflective of the market.”

Analysts whom TODAY spoke to said that in the short term, the US dollar may remain subdued. However, in the longer run, factors such as a stronger US economy, interest rate hikes and tax cuts will lead the dollar to strengthen.

Against the backdrop of the Trump administration’s protectionist stance, IG market strategist Pan Jingyi said it could be status quo in terms of the strength of the US dollar for the next three to six months. with tensions with other countries arising from the US’ recent trade announcement playing a part, among other factors.

Earlier this week, Mr Trump announced steep tariffs on imports of washing machines and solar energy cells and panels.

Nevertheless, Phillip Futures analyst Samuel Siew said the outlook for the US dollar is “still strong” in the long run, given that the data points to a strengthening US economy. For example, US unemployment rate is at a 17-year low of 4.1 per cent.

In the coming months, other developments could also affect the Singapore dollar and US dollar movements, said Mr Siew.

He noted that there could be a potential rise in demand for the US dollar, as measures kick in to allow American companies to repatriate overseas earnings at steeply reduced tax rates. “The new tax law allows US companies to bring back cash to the US at reduced rates for a limited time, with new rates being at approximately 8 per cent as compared to 35 per cent in the past. This has prompted major corporations such as Apple to announce their intention to return foreign earnings left in foreign banks as stockpiles, to the US,” said Mr Siew. “With this inflow to the US, the demand for the US dollar is expected to increase. When that happens, the dollar will strengthen.”

Last month, Mr Trump signed the Republicans’ massive US$1.5 trillion tax overhaul into law, in a bid to boost the US economy.

DBS senior currency strategist Philip Wee said that based on the bank’s forecast, the Singapore dollar will strengthen to between S$1.38 and S$1.40 against the greenback in the year ahead.

The short-term fall in Singapore dollar against the US dollar is “really a US dollar versus Euro story”, said Mr Wee. “We believe that this story is increasingly driven by animal spirits rather than fundamentals. The synchronised global growth story has pushed markets to prematurely bring forward the G3 monetary policy normalisation process,” he said. The G3 comprises the US, Japan and the eurozone.

He added that the fundamental factors which kept the US dollar weak last year have “diminished substantially”, including the rising US 10-year bond yields.

The strength of the Singapore dollar will hinge on the Monetary Authority of Singapore’s (MAS) monetary policy decision in April, the analysts said.

“Markets’ anticipation of a tighter monetary policy by MAS could have led to the recent strengthening of the Singapore dollar. If MAS decides to keep its monetary policy unchanged at its review in April, we will see a correction,” said Mr Siew.

Mr Wee said he expects the Singapore dollar nominal effective exchange rate to return to a mild appreciation stance this year on a better growth outlook for the Republic and the world economy. “and more importantly, (an economic) recovery that is also broadening in Singapore”.