The Singapore dollar's surge to eight-month highs against the greenback this week is hurting manufacturers on two fronts.
Apart from losses on foreign currency transactions, many firms are also facing increasing competition from Malaysia, Indonesia and Thailand, whose currencies are still weaker relative to the Singdollar.
The Singdollar was trading at about 1.3567 to the greenback last night, up from 1.3809 on Wednesday, when United States officials put interest rates on hold and slowed the pace of future hikes - moves that weakened the US currency.
Currency volatility can affect the profitability of exporters or firms that source from abroad. A hedging strategy allows companies negotiating deals in foreign currencies to plan for potential volatility by locking in an exchange rate and securing margins in advance.
Association of Small and Medium Enterprises president Kurt Wee noted that some SMEs are using hedging to offset those risks.
"Some keep part of their funds in US dollars for trading purposes, while some are using forward contracts to hedge so they don't suffer as much losses if the currency moves against them," he said.
"Those that don't do anything may have to absorb losses and then adjust pricing for the next order."
Tai Hua Food Industries managing director and Singapore Food Manufacturers' Association president Thomas Pek said the Singdollar's sudden rise is affecting profitability as the firm is paid in US dollars.
"How can the fluctuations be so fast? The Singdollar dropped to 1.35 in just two weeks from 1.40 levels. That means we lose 0.05 for every US dollar we earn. Plus, we have to compete with Malaysia, Indonesia and Thailand. Their currencies are still weak compared with the Singdollar, and they didn't raise prices, so that affects our exports."
Singapore Business Federation chief executive Ho Meng Kit acknowledged that a weaker greenback may make local exports appear more expensive to US buyers in the short to medium term.
"Correspondingly, it also reduces the costs for local importers and companies can ride on this opportunity for forward contracts," he said.
But firms with large foreign currency transactions that try to hedge to offset risks may not always get their bets right.
The stronger Singdollar is expected to help Recycle Point, a dealer of pre-owned and new video-game consoles and iPhones, to source electronics from the US at cheaper prices.
But owner Adrian Yap said he was "overhedged on the US dollar" as he had bought greenbacks when the Singdollar was at 1.40, on bets that it would firm further. "We sell electronics to Malaysia, Indonesia and Thailand. Given the relative strength of the Singdollar to their currencies, I have to reduce my prices to them, or source from Europe and the US where their currencies are weaker."
A weaker greenback is a boon for Singapore tourists. Demand for travel to the US has remained strong since peaking in 2010 and 2011 when the greenback started to fall, said Ms Jane Chang of Chan Brothers Travel.
When the US dollar started strengthening in the fourth quarter of last year, the agency did not experience a significant drop in demand for travel to the US, she added.
This article was first published on March 19, 2016.
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