The central bank said it intervened in the foreign-exchange market late Tuesday to weaken the local currency, dashing hopes that it might allow the Singapore dollar to strengthen. It was the first occasion the central bank has confirmed a specific intervention since it bought rupiah, along with the Bank of Japan, in November 1997.

The central bank narrowed its acceptable trading band to a width it carried before the regional economic crisis erupted, according to the central bank's managing director, Koh Yong Guan. He also said the central bank will maintain its neutral stance toward foreign-exchange rates.

Analysts said the move could trigger more frequent intervention. But the announcement also reflects increased market stability, which in turn may makeintervention less necessary, they said.

The intervention came as a rude awakening for investors and traders. Many had confidently predicted the Singapore currency was set to rise after central bank chairman and deputy prime minister Lee Hsien Loong told Parliament on Tuesday that economic growth may exceed 2 per cent this year. Coming so soon after the government had announced a 16.4 per cent increase in manufacturing output and a 15.5 per cent rise in key exports for May, Lee's comments cemented the market's belief that economic recovery is well underway in Singapore.

With an upturn in the economy, reasoned foreign-exchange traders, should come a rebound in the currency as the central bank relaxes its vigilance and allows a long-overdue strengthening of the Singapore dollar. Traders promptly bought up the local currency, propelling the U.S. currency to a 13-week low at S$1.6880.

Many analysts predicted further rises. In its morning research note sent to clients early Wednesday, Banque Paribas said:"The market appears finally to have come around to the opinion that the upside for the U.S. dollar against the Singapore dollar is limited, and the central bank, on the other end, is more comfortable with allowing more Singapore dollar appreciation."

Noting that the Singapore dollar has risen 3 per cent from its low for the year, in contrast to 3.5 per cent for the baht and the New Taiwan dollar and 40 per cent for the rupiah, Paribas's analysts called the Singapore dollar the most undervalued currency they follow. Paribas wasn't alone. In their morning note, Standard Chartered analysts cited Singapore's improving economic fundamentals as evidence that "the return to Singapore dollar firmness is unlikely to be threatened near term."

According to a few analysts, however, such optimism was based on a misreading of Singapore government policy. Just because the economy is showing signs of improvement doesn't mean the authorities ill permit the currency to appreciate, they argued. Merrill Lynch, for example,is currently standing by its year-end forecast for S$1.75 against the U.S. dollar. Vincent Low, a currency analyst at Merrill Lynch, conceded this may have to be revised to reflect moves in the dollar against the yen.

The Wall Street Journal