Singapore Dollar and the Carry Trade

The Japanese Yen has been the funding currency for the carry trade for many years. Due to the low interest rate in Japan, many people borrowed money in Yen to invest in higher returns from overseas assets. The Japanese savers also sent their money to invest overseas.

The carry trade has caused the Japanese Yen to weaken considerably against the other currencies. It weakened by more than 15% against the Euro, Australian and New Zealand currency during the past year.

Apart from the Japanese Yen, another currency used to fund the carry trade was the Taiwan dollar, due to its low interest rate. Recently, the authority increased the interest rate to reduce the outflow of funds.

There is a news report in Bloomberg that some people are now looking at the Singapore dollar as the next funding vehicle for the carry trade. This is due to the low interest rate in Singapore.

The impact of the carry trade has been the weakening of the funding currency. As more people invest overseas to earn a higher interest rate, the funding currency is expected to weakened.

But an expert told me that the impact on the Singapore Dollar is likely to be small, as the bulk of currency flows is due to real trade (like our paying for imports of goods and foreigners paying for exports).