Tags: Singapore | Tightens | Policy | Currency | Record | High

Singapore Tightens Policy, Pushing Currency to Record High

Thursday, 14 Oct 2010 07:32 AM

Singapore's central bank surprised markets on Thursday by widening the band in which it lets the Singapore dollar trade in order to cope with global market volatility, propelling the currency to a record high.

It also increased the slope of the trading band but kept the centre unchanged, sparking a rally in the Singapore dollar to as high as S$1.2886 per U.S. dollar from S$1.30 before the announcement and adding to broader selling of the U.S. currency.

"The fact that they steepened the slope and widened the band essentially is that they are optimistic of the outlook but they are also aware of the volatility of the external environment in the coming quarters," said Irvin Seah, an economist at DBS Group in Singapore.

The decision came as the government reported a record contraction in the export-reliant economy during the third quarter, when GDP fell 19.8 percent on a seasonally adjusted annualized basis.

Third-quarter GDP was 10.3 percent higher than the same year-earlier quarter, the advance data showed, and the government maintained its projection that 2010 growth would be between 13 percent and 15 percent following a strong first half.

Despite the dire third-quarter economic contraction, the Monetary Authority of Singapore said "the balance of risks is weighted towards inflation going forward."

It also indicated its policy response was a reaction to the global currency tensions, an issue that dominated a weekend meeting of the International Monetary Fund in Washington and which is set to also dominate meetings of the G20 this month and in November.

"The policy band will at the same time be widened slightly in view of the volatility across international financial markets," MAS said in a statement.

Record low interest rates and weak growth in developed countries have pushed global investors into emerging markets in search of higher yields, driving up their currencies and asset prices.

In response, several governments have intervened to stop their currencies rising too quickly or put measures in place, such as taxes, to curb the capital flows, raising concerns that uncoordinated actions could stunt a world economic recovery.

Singapore has also been hit by the inflows. The stock market has rallied more than 11 percent this year and in the first few minutes of trade on Thursday, rose 0.5 percent.

Foreign exchange traders said selling of the U.S. dollar picked up after the Singapore news broke. The U.S. currency, which has been trending lower since May as the U.S. economic recovery falters, fell to a nine-month low against a basket of major currencies.

"Selling momentum in the (U.S.) dollar seems to be much stronger today than yesterday. The MAS's action also triggered more dollar selling," said Minoru Shioiri, forex manager at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

Singapore's monetary authority, which schedules two policy meetings a year, sets policy by managing the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates.

In April, the central bank tightened policy by moving the centre of its policy band upwards. It also shifted policy to a modest and gradual appreciation for the currency from zero appreciation after record economic growth in the first quarter.

It said it maintained the modest and gradual appreciation in its latest policy statement.

© 2017 Thomson/Reuters. All rights reserved.

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Singapore's central bank surprised markets on Thursday by widening the band in which it lets the Singapore dollar trade in order to cope with global market volatility, propelling the currency to a record high. It also increased the slope of the trading band but kept the...
Singapore,Tightens,Policy,Currency,Record,High
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2010-32-14
 

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