Dollar Falls Sharply Vs Rivals After Singapore Tightening

Discussion in 'Economics' started by ASusilovic, Oct 14, 2010.

  1. TOKYO (Dow Jones)--The dollar tumbled against a wide range of currencies Thursday, hit by continued weakness ahead of expected easing by the Federal Reserve, and quickly accelerated by a surprise decision by the Monetary Authority of Singapore to tighten its monetary policy.

    At a semi-annual meeting Thursday morning, the Singapore central bank surprised many economists by effectively tightening its policy with an increase in slope of its Singapore dollar NEER band, at the same time maintaining its policy of modest and gradual appreciation of the Singapore dollar.

    The result was immediate with the U.S. dollar falling sharply against its Singapore counterpart, dropping quickly below the key levels of S$1.30 and S$1.29, before finding initial support at S$1.2896, an all-time low.

    The policy change was announced even as third quarter Singapore gross domestic product contracted by 19.8%, more than a 17.5% drop forecast by 12 economists in a Dow Jones poll.

    "I think we'll see support around 1.2880," said a trader at a foreign bank in Singapore. In mid-morning Asian trade, it was at S$1.2917.

    "The decision of Singapore's central bank has fed into and exacerbated the broad dollar weakness," said Minoru Shioiri, chief currency trading manager at Mitsubishi UFJ Morgan Stanley Securities.

    There was a clear knock-on effect through Asia's currency markets. The dollar quickly fell to Y81.46 from Y81.85 just before the move, finding some support as it neared the 15-year low of Y81.37 as traders continued to fret over when--and if--Japanese authorities may again intervene.

    The dollar also fell to CHF0.9544 according to EBS, marking another all-time low as the Swiss Franc garners increasing attention as a safe-haven currency.

    As the dollar weakened following the move by Singapore's central bank, the euro jumped to $1.4058, its highest since Jan. 27. At 0050 GMT, it stood at $1.4041. The common currency may extend its gains to around $1.4100 by the end of the global day, said Mitsubishi UFJ Morgan Stanley Securities' Shioiri.

    As the euro has now broken above key technical resistance at $1.4050, it may now trend as high as $1.4300 in coming weeks, said Kenichiro Ikezawa, a senior dealer at Daiwa SB Investments.

    The dollar is expected to remain under severe pressure ahead of the U.S. Federal Open Market Committee meeting on Nov. 3, at which it is expected to announce another program of asset purchases to help stimulate the U.S. economy. Minutes from the last policy meeting, released Tuesday afternoon, continued to cast a pall over the greenback. Fed decision-makers said it would be "appropriate to provide additional monetary policy accommodation" if unemployment remained too high or prices too low. A further easing would likely keep steering investors toward higher-yielding currencies.

    While the Singapore decision was a surprise, one economist said that the move was aimed at containing inflationary pressure as money flows into the country. "With all the talk of currency wars and more of monetary easing in key economies, this (MAS tightening) will help them better absorb inflows," said DBS bank economist Irvin Seah.

    The commodity-backed Australian dollar was another big winner against general U.S. dollar weakness, with the two now closer to parity than at any time since the Australian currency was floated in 1983.

    "Singapore started the run, and then just a lot of stops (orders) were being triggered and it's pushing the U.S. dollar down against everyone," said Joseph Capurso, currency strategist with the Commonwealth Bank of Australia.

    The Australian dollar was at US$0.9960--just off its post float high of US$0.9971 hit around 0015 GMT.

    Though the Australian dollar is now trading seemingly on the doorstep of parity, Capurso thinks it may take some time for the psychologically significant level to be breached. For one, key U.S. inflation and retail sales figures due out on Friday could keep traders from getting overextended prior to the data's release.

    Should either report come in soft, and thus raise the prospect of more quantitative easing by the Federal Reserve, the "Aussie will be at parity comfortably," said Capurso.