Singapore hits dollar, UN body warns of FX war

SEOUL/SINGAPORE (Reuters) - Singapore widened the trading band for its currency in response to rising market volatility and South Korea exchanged barbs with Japan as foreign exchange tensions persisted ahead of a G20 meeting next week.

The dollar, under pressure for weeks on expectations the U.S. Federal Reserve will soon print money again to buoy its faltering economy, fell sharply against a range of currencies on Thursday after the surprise move by Singapore.

Emerging market governments are in a policy bind because of an influx of footloose global capital seeking higher returns than the near-zero interest rates on offer in the developed world, which is driving their currencies up and threatening their export bases. The flows are exacerbating imbalances that policymakers fear could stall a recovery from the deep downturn caused by the global financial crisis and could even lead to a wave of protectionist policies which would wreak further damage.

Verbal jousting from policymakers has intensified in the run-up to a meeting of Group of 20 finance ministers in South Korea next week and a leaders summit in Seoul on November 11-12.

The United Nations Conference on Trade and Development (UNCTAD) warned that a recovery in global investment was now threatened by the specter of a currency war.

"We have seen recently fluctuations of major currencies in a significant manner. There is a danger of a currency war," said James Zhan, director of UNCTAD's investment and enterprise division.

As a result foreign direct investment -- a key source of finance for developing countries -- is likely to stagnate this year at about $1.1 trillion, one quarter below its level in the years running up to the financial crisis, said Zhan.

European Union Monetary Affairs Commissioner Olli Rehn cautioned on a visit to Moscow that disorderly exchange rate movements could have "very adverse implications" for economic and financial stability and pressed countries with undervalued currencies to allow them to appreciate.

Like Rehn, European Central Bank policymaker Christian Noyer played down talk of a currency war but took a swipe at countries like China who are keeping their currencies from rising.

"That penalizes Europe, that penalizes the United States, that penalizes the entire world," Noyer told France's RTL radio.

Singapore widened the trading band for the Singapore dollar for the first time since just after the September 11, 2001 attacks on the United States -- a move analysts said gave it more flexibility to react to a tide of hot money flowing in.

The move propelled the local currency to a record high and helped push the U.S. dollar to a new 15-year low under 81 yen, a 28-year low against the Australian dollar and its weakest level in over eight months against the euro.

Underscoring the strains, state media in South Korea reported Seoul had complained to Japan after Tokyo questioned its leadership of the G20 forum of major economies because of repeated intervention to curb the won.