Singapore widened the trading band for its currency in response to increasing market volatility and India intervened to temper a rising rupee as foreign exchange tensions persisted ahead of a key G20 meeting. The US dollar, under pressure for weeks on expectations the Federal Reserve will soon print money again to buoy a faltering economy, fell sharply against a range of currencies on Thursday after the surprise move by Singapore.
-- UN body warns currency war threatens investment recovery
-- Seoul and Tokyo in tit-for-tat spat ahead of G20
-- US Treasury report on China currency practices due Friday
Emerging nations are in a policy bind because of an influx of footloose global capital seeking higher returns than the near-zero interest rates on offer in the developed world, which is driving their currencies up and threatening their exports. In response, several governments have stepped into foreign exchange markets or tried to curb capital inflows, raising fears of a currency "race to the bottom" that may trigger protectionism and hobble global growth. India's central bank bought dollars around 44.10 rupees on Thursday, dealers said, in what is thought to have been its first such intervention this year.
The Reserve Bank of India has been reluctant to intervene in currency markets but may be forced to again as foreign investors are expected to pour in billions of dollars to buy shares in the country's largest ever IPO, for Coal India. Verbal jousting from policymakers has intensified in the run-up to a meeting of Group of 20 finance ministers in South Korea next week and a leaders summit in Seoul on November 11-12.
The United Nations Conference on Trade and Development (UNCTAD) warned that a recovery in global investment was now threatened by the spectre of a currency war. "We have seen recently fluctuations of major currencies in a significant manner. There is a danger of a currency war," said James Zhan, director of UNCTAD's investment and enterprise division.
As a result foreign direct investment - a key source of finance for developing countries - is likely to stagnate this year at about $1.1 trillion, one quarter below its level in the years running up to the financial crisis, said Zhan. European Union Monetary Affairs Commissioner Olli Rehn cautioned on a visit to Moscow that disorderly exchange rate movements could have "very adverse implications" for economic and financial stability and pressed countries with undervalued currencies to allow them to appreciate.
Like Rehn, European Central Bank policymaker Christian Noyer played down talk of a currency war but took a swipe at countries like China who are keeping their currencies from rising. Singapore widened the trading band for the Singapore dollar for the first time since just after the September 11, 2001 attacks on the United States - a move analysts said gave it more flexibility to react to a tide of hot money flowing in.
The dollar extended losses versus the euro after data showed US initial jobless claims rose more than expected. Underscoring the currency strains, state media in South Korea reported Seoul had complained to Japan after Tokyo questioned its leadership of the G20 forum of major economies because of repeated intervention to curb the won.
Japan itself intervened in the currency market last month for the first time in more than six years to try to stem a rise in the yen that threatens its fragile economic recovery. The next flashpoint will come on Friday, when the US Treasury is expected to make a ruling on whether China is deliberately manipulating its exchange rate - a move that would enrage Beijing and make the prospect of any accord on currencies even more remote.
The United States has not formally branded China a currency manipulator since 1994 and a ruling against it would be a shock despite growing anger from US politicians who accuse Beijing of "stealing jobs" by keeping the yuan artificially cheap. The Chinese central bank, which keeps the yuan's exchange rate on a short leash, let the currency creep up on Thursday to 6.6562 per dollar, the highest level since it abandoned a decade-old peg to the US currency in July 2005.
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