Page last updated at 10:57 GMT, Wednesday, 14 April 2010 11:57 UK

Singapore dollar allowed to appreciate as economy booms

Singapore dollars
Singapore has taken a lead in allowing its currency to rise

Singapore has allowed its currency to rise against the dollar in an effort to tackle worsening inflation and control economic growth.

The Singapore dollar immediately jumped 1.25% to 1.347 to the US dollar.

The central bank raised its inflation forecast to 2.5%-3.5%, and said first quarter annualised growth jumped to 32.1% from -2.8% the previous quarter.

The decision comes amid speculation that China will revalue its currency, the yuan, this year.

Other currencies across the region also jumped on the news, as markets speculated that Singapore's decision could pave the way for higher interest rates in the other big exporting nations.

The Malaysian ringgit appreciated 1.05%, while the Korean won was up 0.85%.

By allowing its currency to rise in value, the Monetary Authority of Singapore (MAS) hopes to control economic growth and inflation.

This is because the stronger exchange rate makes the price of goods, services and investment opportunities outside Singapore cheaper, thereby diverting demand and money away from Singapore towards the rest of the world.

Singapore is not the only country in Asia that is experiencing a rebound in growth, and associated inflationary pressures.

However, with China - the region's biggest exporter - choosing to go slow on any move to allow the yuan to appreciate, economists say that other Asian countries are under pressure to keep their own currencies cheap in order to maintain competitiveness.

The MAS, which allows the value of the Singapore dollar to fluctuate within a fixed exchange rate band, said in its statement that it had now switched to a policy of "modest and gradual appreciation".

The monetary authority meets only twice a year to set exchange rate policy.

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