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Singapore dollar: the next currency to fall?

Tarek El Sombati | E+ | Getty Images

Even the Singapore dollar, underpinned by a robust economy, has failed to escape the pressure facing its regional peers.

The currency has fallen more than 2 percent against the U.S. dollar from a two-month high hit just over two weeks ago, raising the question of whether it may play catch up with neighboring emerging-market currencies that have been caught in a brutal sell-off.

According to foreign exchange strategists, the Singapore dollar should remain "well isolated" from the heavy selling plaguing countries with external deficits such as Indonesia and India. The Indonesian rupiah and Indian rupee have depreciated 6.5 and 16.3 percent, respectively, over the past month.

(Read more: Syria casts 'big black cloud' on emerging markets)

"I don't think we'll see strengthening in the near-term, but it [the Singapore dollar] will outperform its peers on a relative basis," said Mitul Kotecha, head of global foreign-exchange strategy, at Credit Agricole. He expects the Singapore dollar to appreciate to S$1.26 (per U.S. dollar) by year-end, from S$1.28 on Wednesday.

"It's perceived as more of a safe haven relative to other currencies," he added.

Important factors that are expected to shield the currency from the emerging markets storm are the country's strong current account balance, which makes it more resilient to portfolio outflows, and high foreign exchange reserves, say strategists. In 2012, Singapore's current account surplus stood at 19 percent of gross domestic product (GDP), according to the Ministry of Trade and Industry.

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In addition, the Singapore dollar is managed within trade-weighted policy bands where it is allowed to move within an estimated 2 percentage point range of a mid-point, which limits room for pronounced movements in the currency.

Investment bank UBS identifies the Singapore dollar, alongside the Taiwan dollar and Chinese yuan, as the "least vulnerable" Asian currencies in the emerging markets rout. It expects the Sing dollar to appreciate to S$1.25, S$1.24, S$1.23 against the greenback over a 3, 6, 12-month period, respectively.

Nizam Idris, head of strategy, fixed income and currencies at Macquarie bank, agrees that the currency is unlikely to go down the same path as its emerging market peers given a relatively strong economy, but adds that one risk to the currency outlook stems from a potential unwinding of Singapore's property bubble.

"Maybe the one problem with Singapore, is the risk of a property bubble bursting," he said. "But compared to the current account stress seen in other countries in Asia, that's a small risk."

(Read more: How dangerous is Singapore's soaring household debt?)

Low interest rates have led to a surge in home loans in the city state, fueling property prices in the recent years. The fear is that once borrowing costs begin to rise, investors will find it more difficult to service their mortgages, leading to stress in the market.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

Correction: An earlier version of the story said Credit Agricole's Mitul Kotecha expects the Singapore dollar to appreciate to "$1.26 percent by year-end, from $1.28." It should read "S$1.26 by year-end, from S$1.28."

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