Pensword Capital

Worries about upcoming bond sales by Portugal, Spain and Italy sank the euro to S$1.68 at 8pm yesterday. It has fallen significantly from its high of S$2.02 at the start of last year.

The euro also weakened against several other major currencies yesterday. One euro bought US$1.29, touching a low in close to four months.

The debt problem in Europe has drawn fresh attention with speculation that France and Germany are pressuring Portugal to seek help from a European bailout fund to prevent the debt crisis from spreading to Spain. Yields on 10-year government debt of Portugal and Spain surged soon after.

'People are fairly fearful that there is going to be a second round of sovereign debt crisis,' said OCBC economist Selena Ling, who expects the euro to drop further to S$1.55 by the end of the year.

London-based data provider CMA last week listed Greece, Ireland, Portugal and Spain as some of the 10 countries with the highest sovereign debt credit risks in the world. Ireland, ranked third in Q4 2010, climbed from sixth spot in Q3. Spain was a new entry in the top-10 list.

To put the direness of the eurozone debt situation in context, all four countries named above were deemed to have a higher credit risk than war-torn Iraq, which was in 10th place.

Results of bond auctions by Portugal, Spain and Italy will provide a crucial gauge of investor confidence in the region. Portugal aims to raise up to 1.25 billion euros (S$2 billion) by selling three-year and 10-year bonds tomorrow; Spain and Italy will sell bonds on Thursday.

'Failure to attract enough investor interest would signal that Portugal has effectively lost access to capital markets, forcing the country to seek aid,' said UOB economists in a report yesterday.

For the Sing dollar, its new high against the euro provided yet another show of its strength. Last week, less than S$2 bought a British pound.

Some market watchers believe there is a high chance that the Monetary Authority of Singapore (MAS) will let the Sing dollar appreciate further this year to combat inflation, driven by rising wages, food prices, energy costs and other factors.

Citi economist Kit Wei Zheng expects inflation this year to cross the upper end of MAS's full-year forecast of 2-3 per cent.

'The likelihood of further MAS tightening in 2011 remains high,' he said. 'Inflation pressures will likely be the single biggest concern for policymakers in 2011, not least because the looming general election heightens policymakers' sensitivity to rising costs of living.'

Further tightening by MAS is warranted, said Barclays economist Leong Wai Ho, who expects as little as S$1.26 to be worth the same as a US dollar by the end of the year. The dollar went for S$1.30 yesterday.

A stronger Sing dollar will come as bad news to companies with businesses overseas, but good news to travel-happy Singaporeans.

CTC Travels senior vice-president for marketing Alicia Seah said that the number of visitors to Europe, including the UK, already rose 30 per cent last year partly because of the strong Sing dollar. Another 20-30 per cent increase in traveller volume this year is possible, she said.