Asian central banks to restrain gains in currencies

More Asian central banks yesterday signalled they would intervene to curb gains in their currencies against the faltering US dollar, fearing uncertain worldwide recovery and slower growth in their economies.

Singapore's central bank decided against encouraging currency appreciation at a policy review yesterday, saying it lacked faith in the global recovery and feared slower growth in the island's export-dependent economy.

The Monetary Authority of Singapore (MAS) uses the currency as its main policy tool, and traders had pushed it higher, anticipating that the central bank would tolerate more appreciation as the economy rebounded strongly from recession earlier this year.

The comments follow a recent flurry of intervention in foreign exchange markets by Asian central banks – South Korea, Taiwan, the Philippines and Thailand – as their currencies appreciate against a broadly weak US dollar.

The central bank kept policy on hold even though gross domestic product grew a seasonally adjusted 14.9 per cent in the third quarter compared with the previous three months, beating forecasts as services and manufacturing surged.

The central bank said it did not think the Singaporean economy could sustain that pace of recovery while demand sputters in its Western export markets.

"While prospects for the external economies have improved, final demand in Singapore's key export markets... has yet to recover decisively," the bank said.

Echoing concerns of policy makers from South Korea to the United States, the MAS questioned whether demand would survive if governments withdrew stimulus spending that cushioned the global economy from the financial crisis.

"Household spending, particularly in the US, continues to be constrained by the weak labour market, sluggish income growth, and lower housing wealth," it said. "Against this backdrop, the Singapore economy is likely to settle at a more gradual pace of expansion."

The bank said it left policy unchanged, deciding against exercising any of the options in its tool kit that would have given the rallying Singapore more room to appreciate.

"The statement is littered with cautious remarks," said Robert Prior-Wandesforde, Asia economist at HSBC in Singapore. "We see buying USD-SGD as a useful portfolio hedge for investors who are long Asian currency."

The Singapore dollar fell as far as 1.4010 per US dollar, down nearly 0.4 per cent from Friday's close and compared with 1.3950 just before the policy announcement.

The currency rose last week as some investors bet on tightening.

The currency has been trading firmer than currencies of its trading partners for weeks. Even yesterday, estimates by Westpac Bank placed the trade-weighted Singapore dollar two per cent firmer than the mid-point of the MAS policy band.

The MAS, which reviews policy twice-yearly and will publish its next statement in April, manages the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates.

"On the policy front... the chances are the central bank is building towards April normalisation," said Wai Ho Leong, economist at Barclays in Singapore.

Singapore's reliance on trade – exports are twice the value of GDP – force the central bank to track the fortunes of the global economy more closely than most peers. In April, it opted for a smaller currency devaluation than the market was expecting, citing optimism that government spending, especially in China, would pull the global economy out of a trough.

It was a prescient decision.

World stock markets recovered all their losses of the past year as economies rebounded in Asia and steadied in much of the industrialised world.

The bank's more cautious tone reflected concerns around the world the recovery may run out of steam.

"On monetary policy, this is bang in line with what we have seen from South Korea, from the ECB, from the Federal Reserve, who are acknowledging the recovery but said it is in its early days," said Edward Teather, an economist at UBS.

The Bank of Korea appeared to back away last week from a threat to raise rates to cool the housing market. US Federal Reserve Chairman Ben Bernanke said that while policy makers were thinking of unwinding stimulus to avoid a surge in inflation, the economy would need support for quite some time.

The Singapore Government lifted its forecast for 2009 gross domestic product to a contraction of between 2.5 to two per cent.

The economy expanded a forecast-beating 0.8 per cent in the third quarter from a year ago, returning to growth after three quarters of contraction.

"Singapore's growth figures should raise expectations for a lively third quarter growth outcome in the more open economies of Hong Kong and Malaysia," said Teather of UBS.

Thailand's central bank also yesterday signalled it would intervene further to curb gains in the baht and said it was diversifying its foreign reserves after weeks of buying US dollars.

Bank of Thailand Governor Tarisa Watanagase said the baht was moving in line with other Asian currencies and there was no need for a repeat of the 2006 capital controls that were imposed by an army-appointed government to try to curb a rise in the currency.

Even though they were lifted in early 2008, foreigners account for only about one per cent of bond trade.

"We are still taking care of the baht," she said in a turn of phrase that's become a euphemism for intervention at the central bank.

Foreign investors have bought a net 65 billion baht (Dh7.1bn) of Thai shares this year, contributing to a more than 60 per cent rise in stock prices.

 

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