Thursday, April 14, 2016

Currencies Across Asia Fall Sharply Against U.S. Dollar

Currencies across Asia including the Chinese yuan dropped sharply against the U.S. dollar Thursday, with markets caught off-guard as the Singapore central bank restrained the appreciation of its currency to stoke growth.

The yuan saw its biggest one-day depreciation since January, and the Singapore dollar fell by the most within a day this year. Meanwhile, the South Korean won weakened after the ruling party lost its parliamentary majority.

Asian currencies had firmed up against the greenback in recent weeks, partly thanks to the Federal Reserve having signaled it would raise interest rates at a slower rate this year than previously expected. Economic policy makers from the Group of 20 nations had pledged at a meeting in February to avoid sparking a currency war through competitive devaluation.

A weakening of the yuan against the U.S. dollar in its daily fix weighed on currencies across the region, after a 0.46% depreciation—the biggest since January.

The region’s currency markets had started the day on the back foot as traders assessed first the impact of South Korea’s elections, followed by Singapore’s surprise easing.

Movements of the yuan fix, which determines the levels at which the currency can trade inside mainland China, have recently been more determined by market forces. Today’s depreciation reflects strength in the U.S. dollar on Wednesday.

Thursday’s yuan depreciation was the biggest since Jan. 7, when markets had speculated that moves to weaken the yuan could trigger a global currency war. Competitive currency devaluation hasn’t materialized among major economies since then, but other central banks in smaller countries in Asia are loosening policy in the meantime.

The Monetary Authority of Singapore became the latest to surprise markets by easing its policy stance as it warned of threats to growth. The Singapore dollar fell as much as 1.1% to 1.3654 against the U.S. dollar, the biggest intraday move since mid-December.

The Korean won weakened 0.7% to 1153.305 to the dollar after South Korea’s ruling party lost its parliamentary majority, raising doubts about the government’s ability to push ahead with economic reforms.

“The Singapore economy is projected to expand at a more modest pace in 2016 than envisaged in the October policy review,” the Monetary Authority of Singapore said in a statement. The central bank also forecast a decline of between 0% and 1% this year in headline consumer price inflation, which has been falling every month since November 2014 as a result of measures intended to cool the economy. It warned, too, that any pickup this year in core inflation, which strips out the cost of private road transport and accommodation, may be less than previously anticipated.

Singapore’s central bank flattened the expected appreciation of the Singapore dollar, setting the rate of appreciation of its nominal effective exchange rate to zero. Previously, it had been set to gradually strengthen to avoid importing inflation from overseas. The Singapore dollar trades in a band against a basket of currencies.

In easing, Singapore’s central bank was following others around Asia. India, New Zealand and Indonesia have all cut interest rates in the past six weeks, and Japan implemented negative interest rates on some deposits earlier this year.

The International Monetary Fund lowered its global growth forecasts for the year ahead to 3.2% this week, down 0.2 percentage point from projections issued in January...
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