Singapore dollar tumbles after central bank shock

[SINGAPORE] Singapore's dollar tumbled after the Asian nation unexpectedly eased monetary policy, highlighting the divergence among central-bank strategies before a Federal Reserve meeting that concludes on Wednesday in Washington.

Measures of volatility have jumped in currency markets this year as central banks from Canada to Switzerland roiled markets with surprise policy moves.

The Monetary Authority of Singapore said it will seek slower appreciation against a basket of currencies, sending the local dollar to the lowest since 2010.

Australia's dollar rose after a report showed the country's underlying inflation accelerated. China's yuan fell to a record discount against the central bank's reference rate.

"It's part of a bigger trend - a number of central banks are turning more dovish - the key point here is we don't think the Fed is part of the trend," Vassili Serebriakov, a New York- based foreign-exchange strategist at BNP Paribas SA, said in a phone interview. "You have a stronger dollar on the back of all these developments."

Singapore's currency declined 1.1 per cent to S$1.3531 per dollar at 10:23am in New York and touched S$1.3569, the weakest since August 2010, according to prices compiled by Bloomberg. Realized one-month volatility on the currency jumped to 6.38 per cent, the highest since July 2013.

The US dollar appreciated 0.6 per cent to US$1.1312 per euro, after weakening 1.3 per cent the previous day, the most since Oct 15. It reached US$1.1098 on Jan 26, the strongest since September 2003. The yen rose 0.1 per cent to 117.80 per dollar and strengthened 0.7 per cent to 133.26 per euro.

The Bloomberg Dollar Spot Index, a gauge of the currency's performance against 10 major peers, rose 0.3 per cent to 1,157.87. It closed at 1,161.42 in New York on Monday, the highest in data back to 2004.

The Aussie rose for a third day as the trimmed-mean gauge of Australia's consumer-price index - one of the Reserve Bank's preferred measures - rose 0.7 per cent in the fourth quarter from the previous three-month period, beating the 0.5 per cent median estimate of economists surveyed by Bloomberg News. The RBA targets an inflation rate of 2 per cent to 3 per cent.

The central bank holds this year's first policy meeting on Feb 3, while Reserve Bank of New Zealand sets rates on Thursday in Wellington.

The Aussie gained 0.2 per cent to 79.56 US cents, advancing from 78.55 reached on Monday, the least since July 2009.

China's currency weakened to 6.2480 per dollar, according to prices from the China Foreign Exchange Trade System. It touched 6.2488, more than 1.9 per cent weaker than the People's Bank of China reference rate and close to the daily divergence limit of 2 per cent. The monetary authority raised the fixing by 0.13 per cent Wednesday, the most since Dec 8, to 6.1282.

The Singapore dollar weakened against all of the 16 major currencies after the MAS, which uses the currency as its main policy tool, announced its decision in an unscheduled statement on Wednesday. It also cut the inflation forecast for 2015, predicting prices may fall as much as 0.5 per cent.

"It's putting into investors' minds that any central bank that is dovish can suddenly turn more dovish," said Michael Sneyd, a currency strategist at BNP Paribas SA in London.

"It's almost a paradigm shift in how we think of rates policy. We don't expect any major changes to the Fed's statement tonight but the market is about 50/50 - whatever the outcome, we may get a reasonably dramatic move."

JPMorgan Chase & Co's global gauge of currency price swings climbed to as high as 11.68 per cent this month, the most since June 2013, and was 10.65 per cent on Wednesday.

Former Bank of England Governor Mervyn King said in Tokyo earlier on Wednesday that central banks and governments are becoming more and more strident in their determination to talk down their exchange rates.

"Many countries today can see that they have taken monetary policy as far as they can go," Mr King said at the Tokyo Global Economic Forum. "Exchange-rate policy may now become an instrument of monetary policy."

The Fed is forecast to leave interest rates unchanged at the two-day policy meeting that ends on Wednesday, a Bloomberg survey of economists shows.

Policy makers have kept that target in a range of zero to 0.25 per cent since December 2008 to support economic growth. The chance of a interest-rate increase by the October meeting was 52 per cent, futures data showed.

BLOOMBERG