Chart of the Day: See the sharp drop in Singapore’s forex reserves

Forex reserves stand at US$250b in May.

This chart from UBS shows the steep drop in Singapore's official foreign reserves (OFR), which have fallen from a high of around US$278b in June 2014 to US$250.1b in May 2015.

Analysts have speculated that Singapore's reserves are dwindling due to the central bank's aggressive intervention to keep the SGD strong.

However, the MAS has clarified that the decline in the US Dollar (USD) value of the OFR in past months was due to currency translation effects arising from the broad-based appreciation of the USD against the other major currencies in the OFR.

“All Asian economies have large foreign reserves relative to short-term foreign liabilities. This provides a cushion against external financial shocks. Regarding money supply, the change in foreign reserves equals the change in central bank net foreign assets, which makes up the largest portion of base money or primary source of liquidity,” said UBS.

“Thus rising foreign reserves necessarily means upward pressure on domestic liquidity conditions. This typically results for foreign exchange rate intervention, which must then be sterilized. The pressures on domestic liquidity conditions tighten when foreign reserves fall. Big changes in foreign reserves also demonstrate the degree of pressure on currencies to adjust,” UBS added.