PETALING JAYA: Singapore’s monetary authority yesterday tweaked its policy on the local dollar’s trading band in response to rising volatility in the global currency market, as policymakers across Asia struggled to deal with the flood of investment funds that had inflated asset prices across the region.
“The unexpected widening of the band is perhaps the Monetary Authority of Singapore’s (MAS) proactive management amid talks of currency wars,’’ CIMB Research said in a note yesterday.
Singapore’s surprise tightening move sparked a fresh round of sell-off on the US dollar against a broad range of currencies, as traders bailed out from holding the greenback on mounting speculation that the US Federal Reserve will print more money to revive the ailing economy.
The weak US dollar is at the centre of simmering global currency tension.
The latest spat involved South Korea and Japan, after Japanese Prime Minister Naoto Kan on Wednesday criticised South Korea and China for their monetary policies to cap rises in their currencies.
Yesterday, Kan pledged to take “resolute” action to stem the yen’s rise after the currency hit a new 15-year high against the US dollar.
In South Korea, the central bank yesterday avoided raising interest rate, partly because of concerns that higher rates would attract more funds to come into the domestic market and further strengthen the won.
Asian currencies, including the Korean won, the ringgit, the Singapore dollar and Thailand’s baht are at, or near, multiple-year highs against the falling US dollar because global investors are abandoning ultra-low yielding markets like the United States for higher returns in emerging markets.
The massive inflows had inflated asset prices and the unwarranted currency appreciation is starting to hurt exports.
At home, the Federation of Malaysian Manufacturers, with its counterpart in Thailand, issued a joint statement yesterday to express their concerns over “unbridled speculation and inflows of hot money” that is propelling currency appreciation across the region.
“We call upon policy-makers in our countries to be more watchful of developments in the financial markets given the high levels of liquidity and the relative attractiveness of our markets in terms of yield,’’ the statement said.
“The identification and timely implementation of appropriate measures will check adverse currency developments in the financial sector and ensure sustainability of economic growth going forward,’’ it said.
Speculative fund flows, they said, would “adversely affect output, trade and jobs.’’
“We are constantly reminded of the debilitating impact that the 1997 financial crisis had on manufacturers and their operations ... because of volatility of the currency that made trading agreements/operations impossible, plunging our economies into recession,’’ the statement said.
Earlier this week, Thailand imposed a 15% tax on foreign investors’ profit from holding domestic debts.
The baht had gained 11.9% against the fledgling US dollar so far this year, the fastest gain in the region ahead of the ringgit’s 11.1% advance.
The Singapore dollar, which surged to a new high against the US dollar yesterday, appreciated 8.6% against the greenback.
The last time MAS widened the trading band of the Singapore dollar was nine years ago to accommodate very volatile market conditions after Sept 11, 2001.
The surprise policy adjustment highlighted Singapore’s primary concern to tackle rising domestic prices. A stronger Singapore dollar would help cut down its import bills.
Singapore’s Ministry of Trade and Industry yesterday projected the economy to grow 10.3% in the third quarter, and was on track to achieve the targeted growth range of between 13% and 15% for the whole year.
Analysts said the wider range allowed Singapore to keep the local dollar towards the top of the band to combat inflation, and at the same time gave them the flexibility to push it downwards if economic growth faltered.