Singapore revalued its currency on Wednesday, a move that propelled its dollar to a 20-month high and lifted Asian currencies by reinforcing market expectations China could soon unshackle its yuan.

Singapore's central bank said the economy has fully recovered from its worst ever recession but inflationary pressures were likely to pick up, and so moved the currency band up and switched to a policy of its modest and gradual appreciation..

Other Asian currencies, such as the Malaysian ringgit, also rose after the decision, reflecting market speculation that Beijing could also let its yuan currency strengthen to deal with the threat of inflation.

'China has been expected to allow a yuan revaluation.
 Today's Singapore step reignited the prospect among investors,' said Kim Jae-eun, economist at Hyundai Securities. '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 percent for 2010, and its 2010 GDP forecast to 7-9 percent.

The policy decision came as the economy expanded a much bigger-than-expected 32.1 percent on a seasonally adjusted annualised basis in the first quarter, the highest since records began in 1975.

'MAS focus is shifting its attention to inflation now, hence today's aggressive move...Given (China) is also facing some inflationary pressure, it should move the currency to address that,' said Perry Kojodjojo, HSBC currency strategist.   

He said Singapore's move increased expectations central banks will need to hike rates earlier, making the carry trade more attractive, resulting in more inflows and causing currencies to appreciate.

Singapore's central bank only sets policy twice a year and so risked being behind the curve if it had not tightened now.
It manages the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates. It re-centreed this band to the prevailing exchange rate level, which was in the upper half of the band.

Economists said this meant the currency had been revalued by between 1.2 and 1.4 percent, with some predicting the currency could reach 1.36 within months, near a record around 1.345.

The Singapore dollar strengthened to 1.3784 against the U.S. dollar by 0527 GMT, up about 1 percent from before the policy decision. It has has gained about 1.9 percent so far this year, still less than most emerging Asian market currencies. - Reuters