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Singapore has moved to allow a gradual appreciation of the Singapore dollar due to a stronger than expected recovery in the economy and the threats of inflation.

The move propelled its dollar to a 20-month high and lifted Asian currencies by reinforcing market expectations China could soon move to appreciate the yuan.

According to the Monetary Authority of Singapore (MAS): “ The Singapore economy has rebounded from the downturn and is expected to continue on its firm recovery path given the more favourable global economic outlook.  At the same time, inflationary pressures are likely to pick up, driven by rising global commodity prices as well as some domestic cost factors.

“MAS will therefore re-centre the exchange rate policy band at the prevailing level of the Singapore dollar nominal effective exchange rate.  Further, we will shift the policy band from that of a zero percent appreciation to one of modest and gradual appreciation.  There will be no change to the width of the policy band.”

Analysts quoted by Reuters say Singapore’s step may be used as an excuse for other countries such as the US to press China more on a currency appreciation. Beijing has effectively frozen the yuan in mid-2008 to help its exporters weather the global crisis and speculation is rife it will let it off the leash soon with the Chinese economy operating at full throttle again and price pressures building up.

Singapore lifted its inflation projection to between 2.5 and 3.5% for 2010, and its 2010 GDP forecast to 7% to 9%.

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