SEOUL (Reuters) - The Singapore dollar on Wednesday hit its weakest in nearly four and a half years, driving losses among emerging Asian currencies, as regional central banks may follow the city-state's unexpected monetary policy easing to tackle deflation.
The Monetary Authority of Singapore (MAS) reduced the slope of its monetary policy band ahead of its scheduled review in April. The central bank also cut its inflation forecast for the year.
Singapore manages monetary policy by controlling the exchange rate, rather than borrowing costs, because trade dominates the economy.
The surprise move sent the Singapore dollar to 1.3570 per U.S. dollar, its weakest since August 2010, on hedge funds selling.
Malaysia's ringgit and Thailand's baht also fell, reflecting perceived risks that the central banks of those countries could surprise with interest rate cuts later in the day.
"Bank of Thailand is a potential candidate. We see risks of a move today," said Jonathan Cavenagh, senior FX strategist with Westpac in Singapore, when asked if other central banks will ease.
South Korea's central bank is also expected to cut its interest rate, he added.
A number of central banks have eased their monetary policy in recent days to cope with deflation and prop up economies, leading to speculation that the U.S. Federal Reserve could take a dovish turn in its post-meeting statement after this week's meeting.
Analysts now assume the MAS's slope in the Singapore dollar nominal effective exchange rate (NEER) appreciation is at 1 per cent per annum, compared to their previously thought 2 per cent appreciation.
They are revising down the Singapore dollar's targets.
Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore, expected more stimulus in April.
"Another re-centering is still on the cards. It may be possible to ease further in April," Ji said.
MAS earlier said that it would continue to stick with a policy of allowing the Singapore dollar to appreciate modestly and gradually against a basket of currencies, although it would reduce the slope of appreciation.
The city-state's currency has been suffering from a sluggish economy and slowing inflation. Some investors had already expected the central bank to ease monetary policy in the upcoming review in April.
The Singapore dollar was the second-worst performing emerging Asian currency after the Malaysian ringgit so far this year with a 1.9 percent depreciation, according to Thomson Reuters data.
The ringgit fell, tracking the weakness in the neighbouring Singapore dollar.
The Malaysian currency found some relief as investors sold the Singapore dollar against the ringgit.
Still, the ringgit stayed under pressure on risks of a central bank rate cut later in the day.
Bank Negara is expected to keep its key interest rate unchanged at 3.25 percent, as the country's economy remains at risk from a slump in oil prices and a weakened currency, a Reuters poll showed.
The baht fell as offshore funds and local traders, betting a rate cut later in the day.
"What the MAS did today may put pressure on the BOT," said a Thai bank currency trader in Bangkok.
In a Reuters survey on Monday, the Bank of Thailand was expected to leave its policy interest rate steady at 2.00 percent.