Responding to some dire economic data, the Monetary Authority of Singapore on October 10 said it was widening its preferred trading band for the trade weighted Singapore dollar.

That was taken as tacit acceptance of a weaker currency and, since the exchange rate is its main monetary policy tool, the equivalent of a cut in official interest rates.

However, the tight-lipped MAS does not disclose what its preferred band actually is nor did it deign to tell the market by how much the band had widened.

The resulting uncertainty left the market paralysed, with many investors unwilling to actively sell the currency in case they were misreading the MAS. So when a local bank stepped in today to sell in size, many suspected it was under orders.

"There is a lot of pessimism, the good days are gone," a chief dealer at a European bank said. "More worrying is that today's (Sing dollar) selloff is led by a local bank which indicates where authorities want the market to go," he said.

The where was lower, with the local dollar sinking as deep as S$1.8248 per U.S. dollar from around S$1.8020 late on Wednesday (Oct 10). That brought its losses in the last month to over five percent and S$1.8388 hit in July this year.

Over two percent of that drop has come just this week and if it stays this low through Friday it will mark the currency's largest weekly drop since the dark days of the 1997-98 Asian Crisis.

ONCE BITTEN...

The comparisons with 1998 do not stop there since the city-state is facing a similar collapse in exports and an even worse impact on growth.

Government figures released on Wednesday(Oct 10) showed the economy suffering its worst recession in decades, with gross domestic product (GDP) falling a hefty 5.6 percent in the third quarter.

That forced the government to slash its 2001 GDP forecast to a contraction of 3.0 percent, against earlier expected growth of 0.5 to 1.5 percent.

Since exports make up around 70 percent of GDP, analysts said there was little the authorities could do but allow a decline in the currency to help boost competitiveness, though it didn't help that the MAS was as closed as the economy was open.

"It seems they (MAS) are trying to guide the market into a new trading range and in the process accumulate dollars for reserves which can be used later to defend the weaker end," a currency analyst at a U.S. bank said.

And while the trading band remains a secret, the market has no choice but to probe the acceptable limits, he said.

Some thought the new band stretched to only S$1.8300 while other reckoned 1.8500 or even 1.9000 were possible targets.

However, analysts said currency market volatility in the past several weeks has left few players with enough courage to venture into the unknown.

"Players are mindful that the trend can be quickly reversed on any shift in the dollar sentiment which is still prone to a lot of volatility. You cannot rule out more terrorist acts," said Philip Wee of DBS Bank in Singapore.

The central bank also had a tricky balancing act in engineering a controlled depreciation without stirring fears that resulting rises in import prices would lead to higher inflation.

If they failed, then money market interest rates could rise so undoing much of the currency's easing.

"The MAS will not encourage a sharp depreciation as it may hit overall confidence on currency stability," said Wee.