Singapore Currency Revaluation

According to Reuters on Wednesday April 14,2010 Singapore revalued it’s currency sending it’s dollar to a 20-month high. This move was taken after data was revealed showing that Singapore’ economy had expanded an unprecedented 32.1 percent on a seasonally adjusted annualized basis for the first quarter. This jump in GDP was stronger than expected and is the highest rate since records began in 1975. Singapore also raised its inflation expectations for 2010 to 3.5 percent. The expected rise in inflation and the large jump in GDP are what caused Singapore to allow its currency to rise; Singapore uses its currency instead of interest rates to manage its economy. This move is very important because it reflects increasing expectations that China will allow its currency to trade at a higher rate sometime in the near future. Countries like India, Australia, and Malaysia have all raised the value of their currencies as many Asian countries brace for rising global interest rates and a change in the valuation of major currencies like the Yuan. An increasingly valuable currency will put more purchasing power in the hands of Asian consumers possibly setting the stage for a shift in the economies of many of these countries from exported based to focusing more on domestic consumption, possibly improving the standard of living for many on the Asian continent; this will also make Asian exports more expensive as they will be faced with a less advantageous exchange rate, while also requiring higher production costs. If Asian currencies, and in particular the RNB, become more valuable there will be some important implications for the United States. Firstly prices of imports from Asian countries will rise meaning higher prices for traditionally low cost Asian goods. Also, as the Chinese and other countries purchase U.S. treasuries in order to keep their currencies artificially low a rise in the RNB or other Asian currencies could mean a large scale sell-off of U.S. treasuries. This will drive demand for U.S. treasuries and bonds down thus increasing borrowing costs for the U.S. which depends heavily on borrowing to finance its large budget deficit.