Washington, already aggressively pushing against allegedly sharp trade practices by China, has turned its attention on the forex regimes of several countries, including Malaysia and its neighbour, Singapore.

The US has added Singapore and Malaysia to a watchlist of trading partners who, it claims, manipulate their foreign exchange rates. Singapore's central bank hit back at the claims, saying that it gained no market advantage by intervention. Malaysia's national bank said that its currency freely floated and was not manipulated.

Donald Trump's administration, which has taken an aggressive posture towards a number of countries' trade practices in recent months, said that no major trading partner met its currency manipulation criteria but nine countries merited "close attention".

The addition of Singapore, a wealth management hub and important financial centre, to the Washington list will concern the Asian city-state's leaders and central bank, the Monetary Policy of Singapore, said. Since its independence from the UK in the 1960s,Singapore has developed broadly strong relationships with the US and has benefited from increased globalisation of trade.

The US actions also highlight how Washington is fretting about future threats to the dollar's status as a global reserve currency, particularly as the centre of economic gravity appears to be heading East. The US has been able to fund its record $22 trillion public debt more easily than otherwise would be the case due to the dollar's global status. China has pushed to make its own renminbi currency more widely used and it is now included in the basket of currencies used by the International Monetary Fund for its Special Drawing Rights system.

The additions of Malaysia and Singapore to the list came from a semi-annual report to the US Congress from the US Treasury Department. The report examined the policies of an expanded set of 21 major US trading partners.

"No major US trading partner met the relevant 2015 legislative criteria for enhanced analysis" as a currency manipulator, but nine "merit close attention to their currency practices and macroeconomic policies", the department is reported by media to have said.

The other trading partners added to the list were: China, Germany, Ireland, Italy, Japan, South Korea and Vietnam.

MAS response
Singapore's central bank said that it "does not manipulate its currency for export advantage".

"Singapore’s monetary policy framework, which is centred on the exchange rate, has always been aimed at ensuring medium-term price stability, and will continue to do so. As pointed out in the UST Report, MAS manages the Singapore dollar nominal effective exchange rate (S$NEER) within a policy band, just as other central banks conduct monetary policy by targeting interest rates. Whether they target the exchange rate or the interest rate, central banks aim to keep consumer price inflation low and stable as their primary mandate," it said.

"MAS does not and cannot use the exchange rate to gain an export advantage or achieve a current account surplus. A deliberate weakening of the Singapore dollar would cause inflation to spike and compromise MAS’ price stability objective," it continued.

"Singapore’s current account balance should be viewed in context. In its early years of development, Singapore ran persistently large current account deficits averaging close to 10 per cent of GDP between 1965-84, when its investment needs were greater than available saving. As the economy matured, its investment needs tapered off, while national saving rose. Consequently, the current account turned into a surplus position," it said.

Malaysia
Malaysia supports free and fair trade, and does not practise unfair currency practices. Malaysia adopts a floating exchange rate regime," Bank Negara Malaysia, the central bank, said in a statement.

"The ringgit exchange rate is market-determined and is not relied upon for exports competitiveness. As acknowledged by the report, Bank Negara Malaysia’s (BNM) intervention over the last few years has been in both directions of the foreign exchange market. Any intervention is limited to ensuring an orderly market and avoiding excessive volatility of the exchange rate that may affect macroeconomic stability. The fact that the ringgit has over the years faced multiple episodes of significant appreciation and depreciation points to the flexibility of the exchange rate," it continued.

"As a small and highly open economy, Malaysia’s current account of the balance of payments is affected by both internal and external developments, including cyclical and structural factors. About half of Malaysia’s trade surplus is driven by commodity exports, which is largely influenced by global demand and supply, as opposed to the exchange rate. Manufactured goods surplus, on the other hand, is partly driven by the long-standing presence of large export-oriented multinational corporations in Malaysia, including from the US. The current account surplus is thus a reflection of the diversified nature of the Malaysian economy," it said.

The bank said that the US action will not affect the Malaysian economy.

A number of Asia-Pacific countries' exchange rates, some of which were pegged to the dollar, as in the case of Thailand, broke up dramatically more than 20 years ago in the region's financial crisis. Many of these nations have since built large forex reserves to avoid a repeat of the episode and have shifted towards more long-term debt financing to reduce exposure to US interest rate shifts.

The term "currency wars" has been used by US author James Rickards to describe what he fears will happen if or when the US dollar is dethroned as the supreme global reserve currency because of its debt pile and trade imbalances. He is controversial writer, whose books have been reviewed by this publication. See an example here.