Currency wars reach S’pore

October 30, 2010
Singapore Democrats

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NASDAQ

Singapore, one of the world’s most financially sophisticated economies, is making waves in the foreign exchange markets  by electing to let its currency get stronger.

By raising the band in which it will let the Singapore dollar trade, the island powerhouse is effectively coming in on the side of countries that are still more concerned about inflation — a shrinking group until now — than the prospect that an overly strong local currency will stymie local economic activity. Among the nations making forex headline, only India still has a nominally tightening bias toward its currency, and even its will to keep raising local interest rates has cooled over the last few months as inflation apparently tapers off.

Even Brazil, once the hotbed of global inflation fears, is taking unusual steps to stop new money from flooding into local markets and the inflating the value of its currency, the real. Because Singapore’s exchange rates are already linked to the U.S. dollar, the move may be read as more of a concession to market reality than a desire to simply have a stronger monetary unit.

One of the main factors in emerging market currencies’ recent rally is the increased odds that the Federal Reserve will announce a massive new stimulus program soon, temporarily “printing” trillions of new dollars to do so. All those dollars boost supply of U.S. currency, effectively reducing each greenback’s buying power. Since Singapore’s economy would remain unaffected either way, relaxing its trading band only acknowledges that fact.

As things get ugly in the forex markets, retail investors without currency accounts have a real choice here. If you believe that the Fed is moving in and global monetary authorities are powerless to fight it, you can actively bet on a declining dollar via dollar-short ETF-based instruments like UDN or just about any of the ETFs that are theoretically long on foreign currency — the Brazil currency ETF EWZ, for example. Either way, the results should be similar.

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