The odds are growing for Singapore's dollar to be Asia's best-performing currency for a third straight year, as the central bank looks set to keep using a firm exchange rate to combat inflation.

Bloomberg reported today the nation's currency presently ranks in third place in the region for 2024, behind the Hong Kong dollar, which is pegged to the greenback, and the Indian rupee. However, it is catching up with those peers due to speculation sticky price pressures will prompt the Monetary Authority of Singapore (MAS) to maintain its appreciating exchange rate settings in its policy review due on Friday.

"We expect the Singapore dollar to continue its outperformance in the second half, as we don't expect the MAS to aggressively reduce the slope of the S$NEER policy band this year," said Alex Loo, a macro strategist at TD Securities. "The Singapore dollar should continue to benefit from the appreciation path of the policy band, while the pickup in growth momentum and upswing in global trade should bolster its appeal to investors."

The MAS, which uses the exchange rate as its main monetary policy tool, has let the Singapore dollar appreciate against the currencies of the island's major trading partners this year to tackle inflation. The central bank focuses on the currency's nominal effective exchange rate, referred to as S$NEER, which it allows to move within a policy band.

Singapore's core inflation probably slowed to 3% in June, according to a Bloomberg survey of economists before the data is published on Tuesday. The gauge is forecast to ease to around 2% next year in the absence of further shocks, MAS managing director Chia Der Jiun said last week.

Singapore's strong growth prospects also bolster the case for the central bank to leave the currency on its appreciation path.

Gross domestic product (GDP) accelerated in the second quarter, expanding a faster-than-expected 2.9%. The MAS expects the economy to grow near the upper end of a 1%-to-3% range forecast for this year, even as geopolitical tensions and higher global interest rates continue to pose challenges.

While the Hong Kong dollar has been Asia's top performer this year, the increased likelihood of a Federal Reserve rate cut in coming months makes the currency vulnerable to a sharp reversal. The second-placed Indian rupee is also showing fresh signs of weakness, as it hovers near a record low against the greenback.

With Singapore's "GDP growth still not performing too badly in the second quarter of 2024, we suspect there is no urgency for the MAS to ease monetary policy given the stickiness in inflation," said Moh Siong Sim, a foreign-exchange strategist at Bank of Singapore. "We expect the Singapore dollar to remain resilient relative to most of its Asian peers against the risk of renewed US dollar strength going into the US election."