Asian countries continue to show concern about the volatile situation in currency markets ahead of the expected move by the US Federal Reserve to ease its monetary policy significantly early next month.
The Fed is widely expected to reveal plans for a second round of what’s called Quantitative Easing at the end of the two-day meeting on November 3, with between $US500 billion and $US1,000 billion mentioned.
The Fed’s prospective move has already upset markets, driving gold and other commodity prices higher as it has undermined the value of the US dollar.
That has seen currencies around Asia and the euro jump sharply, with the Aussie dollar closing in on parity (around 99.60 USc) with the US currency overnight, followed by the Canadian dollar.
Asian currencies like the yen, won, baht, ringgit and Singapore dollar have risen, forcing some governments to try and limit the rise in the value of their currencies or make investment in their countries (and currencies) less attractive.
But Singapore has moved to make its currency more expensive, a move the Reserve Bank of Australia might make before the Fed meeting by lifting the cash rate to 4.75%.
Both Singapore and Australia face a problem with rising inflation, Singapore’s is just over 3%, ours is roughly the same, but lower on an underlying basis.
So yesterday Singapore’s central bank unexpectedly effectively tightened monetary policy yesterday by allowing faster appreciation of the Singapore dollar.
That was even as the government revealed that the country’s economic growth slowed in the third quarter from the frenetic pace of the first two quarters.
And the central bank of South Korea left rates unchanged with its benchmark rate remaining steady on 2.25% as the country’s housing sector sees falling prices and growing stress.
The South Korean government has already intervened several times this year to stop the won rising in value, which would make the country’s exports more expensive.
The won has been under pressure from capital inflows and the weakness of the US dollar.
On Tuesday Thailand said it was introducing a tax on foreign holdings of bonds.
The government said a 15% withholding tax on capital gains and interest payments for government and state-owned company bonds would be imposed.
It was seen as a clear signal that it would take tough measures to curb inflows of “hot money”.
A surge of money into Thailand has driven the baht to a succession of highs against the dollar since just before the Asian crisis of 1997-1998.
The Thai government has intervened to try and halt the rise in the baht, just as the South Koreans have appeared in the market as well (although they have denied it).
South Korea is chairman of the Group of 20 nations and will head an important leaders meeting next month, so it has been circumspect in its interventions, claiming that they are to smooth volatility.
That’s the same sort of excuse Japan has used to describe its $US25 billion intervention in September to sell the yen to try and drive it lower against the US currency.
The yen has climbed nearly 30% against the greenback since the collapse of Lehman Brothers in September 2008, while the Korean won has weakened 1.2% and 23% against the Japanese currency.
The Bank of Korea has allowed the won to rise 8% against the dollar in the past three months that could help Seoul avoid being criticised during the G20 gathering (just as China is allowing the Yuan to rise gradually against the dollar).
But the move by the MAS in Singapore was the big surprise, not only had it had not been expected, but it was actually a move to allow the currency to rise, not fall or steady.
The move came at one of the two times a year when the Authority announces changes in the way it allows the currency to move.
It effectively tightened its policy with an increase in slope of its Singapore dollar band, at the same time maintaining its policy of modest and gradual appreciation of the Singapore dollar.
The steeper slope will allow a faster rate of appreciation while the wider band will accommodate the increased volatility in the market. ( By way of contrast, China fixes a mid rate for the Yuan each morning and allows only half per cent moves either way in a very narrow band, and apparently buys and sells to stop overshooting, especially on the upside).
The move knocked the US dollar lower to an all time low against the Singapore dollar, and helped the Australian dollar rise past 99.6 USc yesterday.
Why this is different is that the MAS is forcing the value of the Singapore dollar higher, not protecting its value or trying to stop it appreciating, as South Korea and Japan have done (and Taiwan from what is said in the market).
It indicates concern about inflation, which seems a bit odd because the Singapore dollar has already risen by around 8.5% this year.
But from what the MAS said yesterday it’s clear that the rise in the exchange rate hasn’t been enough to put a lid on cost pressures in the island economy.
Singapore’s inflation jumped to an 18-month high of 3.3% in August.
The central bank forecasts price gains may quicken to about 4% by the end of 2010 and “stay high” in the first half of 2011.
Making the move even more surprising was the news from the government that growth slowed in the thi
