The Australian Dollar’s push to parity with the US Dollar is now at risk as policy makers signal they may slow the pace of interest-rate increases and China moves closer to revaluing the Yuan. After rallying 28% on the forex market in the past 12 months analysts are now predicting the currency may fall as much as 16% by the end of the year as higher borrowing costs curb economic growth.

Barclays Capital, which in December forecast a peak of $1 in 2010, now expects the Australian Dollar to be the biggest loser from what it calls a “significant” Yuan revaluation. The Aussie dropped 1.0% against the US Dollar on Friday to close at AUD$ 0.92403. In early trading today it continued to decline against the US Dollar touching a low of AUD$ 0.91516.

Traders and strategists say Reserve Bank of Australia Governor Glenn Stevens may have increased borrowing costs too much too soon after raising the nation’s overnight cash rate to 4.25% this month, up from 3% in October. Home-loan approvals fell in February for a fifth month and retail sales and building approvals declined more than forecast.

The Royal Bank of Australia’s most aggressive tightening cycle since 2000 comes amid growing speculation that China will allow its currency to appreciate to help cool an economy that expanded at the fastest pace in almost three years last quarter. That means China, Australia’s largest trading partner, may buy fewer commodities and cut the demand that helped Australia avoid the global recession and expand its economy by 2.7% in 2009.

“A Yuan revaluation could prove to be a reason for a market rather long Aussie to trim its positions,” Sean Callow, a senior currency strategist at Sydney’s Westpac Banking Corp. said about the bullish sentiment. “As part of an effort to cool inflation and tighten monetary conditions, a revaluation would certainly be a negative for the Aussie.”

High interest rates are one of two main reasons why international investors have put money into the Aussie. The other is China, where 4 trillion-Yuan ($586 billion) of stimulus spending on housing, highways and power grids sparked record imports of iron ore from Australia, the largest shipper. China’s government said on April 15th that its economy expanded at an 11.9% in the first quarter.

Growth is so strong that Chinese officials are now taking steps to keep the economy from overheating. The cabinet raised minimum mortgage rates and down payment ratios for some home purchases, saying “more forceful” steps are needed to cool speculation after house prices rose at a record pace in March. Analysts and economists now expect that the next step will be allowing the Yuan to strengthen. A revaluation could drive up prices of commodities as Dollar based imports to China would become more affordable.

Historically the Aussie has reacted negatively to any tightening of policy by China. In July 2005 it surged 1.3% when China increased the Yuan’s value by 2.1%, only to slump 4.3% over the next five months. The drop was the second largest after the Yen among the most-traded currencies.

U.S. stocks fell last week, halting the longest rally in a year, after reported allegations that one of America’s largest and most profitable investment banks, Goldman Sachs, committed fraud.

A civil suit filed Friday alleges that Goldman Sachs didn’t stick to its long-standing claim that “clients’ interests always come first,” and instead failed to inform investors that the securities they were selling had been designed to fail by another client, hedge fund Paulson & Co., which in turn profited from the Goldman’s client losses. According to the lawsuit, Goldman mislead investors by telling neglecting to them “vital” pieces of information –namely that the so called triple A financial instruments were really made up of subprime mortgages, and that the hedge fund run by John Paulson was primarily involved in choosing which securities would be part of the portfolio.

Goldman Sachs stock value plunged 13% on Friday, the biggest one day drop in the company’s history, wiping out $12.4-billion of its market value as the Securities and Exchange Commission (SEC) sued the bank and one of its vice presidents for allegedly misstating and omitting key facts about a collateralized debt obligation.

According to the SEC, Goldman worked with the hedge fund Paulson & Co to create some of the complicated securities that magnified the damage of the subprime mortgage meltdown. That, in itself, was common. However, what sets this deal apart, according to the SEC, was that Goldman and the hedge fund designed the securities to maximize the chances they would tank. Goldman then profited by selling the questionable investment to customers, and the hedge fund reaped $1 billion by betting that the securities would plummet.

While all signs point to the fact that Goldman-Sachs did break the securities law, the SEC’s investigation into Goldman Sachs could not come at worst possible time. The charges against Goldman, once the most respected but envied firm on Wall Street, come at a time when the idea of a sustainable economic recovery is final taking hold. In the past months, investor confidence has steadily returned as a string of economic news has shown a more willing consumer and a rapid but consistent increase in manufacturing activity. At the same time, corporate profits this quarter are showing improved top line growth, an indication the economy is improving at a rapid pace - a precursor to hiring. Unfortunately, at this point, it doesn’t even matter whether the allegations against Goldman Sachs are lawful; the mere thought that one of America’s largest investment houses could commit such fraudulent activities will cover the market with a thick cloud of deep mistrust and uncertainty. How long that sentiment lasts could depend on whether the accusations against the Wall Street banking titan stick, and if they are symptomatic of a larger contagion within the trading practices of major institutions. Either way, SEC allegations that Goldman misled investors about the subprime mortgages it sold them does not help build confidence that financial markets are operating fairly. Moreover, the charges against Goldman’s arrive just as lawmakers in Washington are negotiating how to reform the U.S banking system. A complete overhaul in the financial system is the next major piece of legislation that President Obama’s agenda. Already the markets have begun to fall just on the mere thought that Washington will begin to crack down on the Wall Street firms.

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.