Singapore to allow stronger currency

Singapore unexpectedly signalled it will allow faster currency gains to curb inflation even as the economy shrank, with slowing global growth hurting demand for drugs and electronics. The local dollar rose to a record.

The Monetary Authority of Singapore said today it will steepen and widen the currency’s trading band while continuing to seek a “modest and gradual appreciation”. Gross domestic product shrank at a 19.8 per cent annual rate in the third quarter from the previous three months after climbing a revised 27.3 per cent in April to June, a separate report showed.

“The implication is that Singapore is less worried about growth and more worried about upside risks to inflation,” said Robert Prior-Wandesforde, head of Southeast Asian economics at Credit Suisse Group in Singapore.

The decision follows pressure from the US and Europe on emerging-market nations to let their exchange rates appreciate to help rebalance demand in the global economy. It also comes as China, the country blamed by US Treasury Secretary Timothy F Geithner this week for prompting other countries to restrain their currencies, starts allowing faster gains in the yuan.

Singapore’s dependence on overseas trade, with non-oil exports equivalent to more than half of GDP, makes it vulnerable to swings in global growth.

Currency climbs
The island’s currency rose 0.8 per cent to S$1.2932 per US dollar as of 10.37 am local time. It earlier reached S$1.2893, the strongest since 1981 when Bloomberg began compiling the data, and has gained 8.4 per cent this year, making it the third-best performing currency in Asia excluding Japan.

Yuan forwards were near a two-year high today. Twelve-month non-deliverable forwards were at 6.4510 per dollar, reflecting bets the currency will strengthen about 3.3 per cent from the spot rate over the next year, according to data compiled by Bloomberg. The forward contracts have risen 1.5 per cent this month.

The Monetary Authority of Singapore uses the currency rather than a benchmark interest rate as its main tool to manage inflation.