For the future of China's currency, see Singapore's

Singapore is allowing its currency to float upward modestly, using a managed float-system that China is also likely to adopt eventually.

Tim Chong/Reuters
A Singapore one dollar coin rests on top of Singapore two dollar notes in this April 13 photo illustration. Singapore's central bank tightened monetary policy on Wednesday and said it will allow a modest and gradual appreciation of the Singapore dollar. This type of float mechanism that China's currency moves to once Beijing drops its hard peg to the dollar.

According to preliminary figures, Singapore's GDP increased as much as 13.1% compared to a year earlier in the first quarter of 2010. Compared to the previous quarter, the gain was an even more impressive 7.2%, or 32.1% at an annualized rate. This however follows an annualized 2.8% contraction in the fourth quarter, so the 6 month increase was only 13.3%, or roughly the same as the 12 month gain.

This confirms what I have previously reported about, how the global recovery is stronger in Asia than in other parts of the world.

Presumably partly as a result of these strong numbers, Singapore's monetary authority today decided to allow a modest 1.2% revaluation of the Singapore dollar, and indicated that it will allow it to gradually rise in the Singapore dollar. Singapore has a "managed float" exchange rate system, which could be seen as something of a compromise between the pure fixed exchange rate systems of for example China and Hong Kong, and the pure floating exchange rate system of for example Japan.

The exchange rate can fluctuate, but the monetary authority significantly limits and largely controls these fluctuations. After having allowed no general increase in value for a while, apparently they now feel that a gradual increase in the value of the Singapore dollar is appropriate.

Singapore's 2009 current account surplus of 49 billion Singapore dollars was nearly 20% of GDP, far more than in for example China and Germany.

When China abandons its peg, they will more likely adopt a Singapore-style managed float-system than a pure float. That was after all the system they had between the summer of 2005 and the summer of 2008, when they temporarily abandoned their pure peg. As Singapore's current account surplus shows, that may not have much of an effect on its surplus.

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