The Singapore dollar's surge to a nearly nine-month high may have caught analysts by surprise after weak economic data, but the rally is likely to be cut short soon, analysts said.
"The Singapore dollar is overvalued," said Callum Henderson, global head of FX research at Standard Chartered, with the gains driven by external factors, not domestic fundamentals.
The currency rallied 0.5 percent over the past week, with the greenback fetching just 1.2359 Singapore dollars Thursday, a level not seen since the end of October last year. It is up nearly 2 percent against the dollar year-to-date.
Henderson expects the U.S. dollar will be fetching 1.26-1.27 Singapore dollars within the next three to six months, as weak economic data in the city-state starts to come back into play.
"What we've seen is reaction in U.S. dollar-Singapore dollar to general weakness that we've seen in the dollar against Asia," said Henderson.
In addition, "a lot of funds have been long the high yielders and short Singapore dollar," added Henderson. "Some of those hedges have been taken off, and to do that you've got to sell the whole thing."
A weaker-than-expected flash estimate for second-quarter growth led many analysts to downgrade their forecast for the economy's full-year growth. Data released Wednesday showed the island-nation's consumer price index rose 1.8 percent in June from a year earlier, down from May's 2.7 percent, as car prices rose at a slower pace, suggesting monetary policy isn't likely to be tightened anytime soon.
"It seems from the change in macro rationale in the last few weeks [that] the justification for this move has weakened a little bit - [the move higher] doesn't really make sense," said Craig Chan, head of FX strategy for Asia ex-Japan at Nomura.
"It could also be related to political noise in Indonesia. People generally see Singapore as a safe haven, especially those in Indonesia and Malaysia," he added.
Indonesia faces some political uncertainty as the losing candidate in the presidential election, Prabowo Subianto, said he would challenge in the Constitutional Court the election commission's declaration of Jokowi Widodo as the winner, alleging widespread cheating.