Yesterday Singapore revalued its currency, propelling its Dollar to a 20 month high against its US counterpart on the forex market as the government there said the economy had recovered from its worst ever recession and that inflationary pressures were likely to pick up. Following the announcement the Singapore Dollar immediately jumped 1.25% to SGD1.3744 to the US Dollar.

The decision was announced as data showed that Singapore’s economy had expanded 32.1% in the first quarter, more than expected and the fastest pace since records began in 1975. Compared to the first quarter of 2009, Singapore’s trade-dependent economy grew 13.1%, the strongest pace since 1994. Singapore raised its inflation projection for 2010 from 2.5% to 3.5% and revised its GDP forecast upward for the second time this year.

By allowing its currency to rise in value, the Monetary Authority of Singapore (MAS) hopes to control economic growth and inflation. This is because the stronger exchange rate makes the price of goods, services and investment opportunities outside Singapore cheaper, thereby diverting demand and money away from Singapore towards the rest of the world.

Singapore’s MAS sets policy just twice a year and would have risked being behind the curve if it had not tightened now. It manages the Singapore Dollar in an undisclosed trade-weighted band against a basket of currencies, instead of setting interest rates. It said in its statement that it had now switched to a policy of “modest and gradual appreciation”.

The announcement comes amid speculation that China will revalue its currency, the Yuan, this year. Other currencies in the region also jumped on the news as markets speculated that Singapore’s decision could pave the way for higher interest rates in the other big exporting nations. The Malaysian ringgit appreciated 1.05%, while the Korean won was up 0.85%.

Perry Kojodjojo, an HSBC currency strategist in Hong Kong, said Singapore’s action had increased expectations that central banks would need to raise rates soon, making the carry trade more attractive — that is, borrowing funds in one currency at a low rate to make higher-yielding investments. That would result in more capital inflows and cause currencies to appreciate.

Asian policy makers are withdrawing stimulus measures taken to counter the global recession as their economies lead the world out of the slump. China, the region’s biggest exporter, announced today that GDP grew 11.9% in the first quarter compared to the same period last year adding pressure on Premier Wen Jiabao to loosen the Yuan’s peg to the US Dollar and raise interest rates.

But for now with China choosing to go slow on any move to allow the Yuan to appreciate, economists say that other Asian countries are under pressure to keep their own currencies cheap in order to maintain competitiveness.