LONDON—The dollar was whacked sharply lower across the board after a surprise monetary tightening by the Monetary Authority of Singapore raised confidence in the Asian economic recovery.
As global stock markets rallied, helped by strong earnings reports from J.P. Morgan and Intel, the Australian dollar rallied to a new 28-year high near parity, the Swiss franc rose to a new record high and the euro traded around $1.41 for the first time since January. The dollar fell to a new 15-month low close to 81 yen.
Analysts pointed out that while the MAS move, which involved widening as well as raising the trading band for the Singapore dollar, indicated that Asian economies are now strong enough to withstand monetary tightening, the dollar is still facing a debate over further quantitative easing in the U.S.
Although so-called QE II is likely to be introduced at the Federal Reserve's next meeting Nov. 3, there is still a big question mark over the size of the easing and the details of the package.
The debate on QE II is likely to be driven by U.S. economic data due later this week and by the tone of a speech by Fed Chairman Ben Bernanke Friday.
However, U.S. trade data due shortly also could provide direction for the dollar if the numbers confirm expectations of a wider trade gap. That would likely intensify pressure on the U.S. administration to cut a deal with China over the yuan's appreciation.
Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London, suggested this could take the form of a compromise in which the Fed pursues less aggressive QE II and China allows the yuan to appreciate more rapidly. This would help to put downward pressure on the euro against the dollar.
The Singapore decision, while a surprise, was aimed at containing inflationary pressure as money flows into the country, one economist said.
"With all the talk of currency wars and more monetary easing in key economies, this [MAS tightening] will help them better absorb inflows," said DBS bank economist Irvin Seah.
The euro recently traded at $1.4098 from $1.3957 late Wednesday in New York. It traded as high as $1.4123, a level last seen in January.
The single currency was also up at 114.46 yen from 114.14 yen.
The dollar fell to 81.19 yen from 81.77 yen and at 0.9498 Swiss francs from 0.9584 francs. The pound rose to $1.6029 from $1.5892. Both the Canadian and Australian dollars traded near parity with the U.S. dollar.
