THE Monetary Authority of Singapore (MAS) decided against encouraging currency appreciation at a policy review yesterday, because of continuing uncertainties in the external economic environment.

MAS uses the currency as its main policy tool and traders had pushed it higher, anticipating that the central bank would tolerate more appreciation as the economy rebounded strongly from recession earlier this year.

The authority kept policy on hold even though gross domestic product grew at a seasonally adjusted annualised rate of 14.9 per cent in the third quarter, beating forecasts as services and manufacturing surged.

MAS said it did not think Singapore's economy could sustain that pace of recovery while demand sputters in its Western export markets.

'While prospects for the external economies have improved, final demand in Singapore's key export markets...has yet to recover decisively,' the authority said in statement.

Echoing concerns of policymakers from South Korea to the United States, the MAS questioned whether demand would survive if governments withdrew stimulus spending that cushioned the global economy from the financial crisis.

'Household spending, particularly in the US, continues to be constrained by the weak labour market, sluggish income growth, and lower housing wealth,' it said.

'Against this backdrop, the Singapore economy is likely to settle at a more gradual pace of expansion.'

The central bank said it left policy unchanged, deciding against exercising any of the options in its tool kit that would have given the rallying Singapore dollar more room to appreciate.

The Singapore dollar fell as far as 1.4017 per US dollar, down nearly 0.5 per cent from last Friday's close and compared with 1.3950 just before the policy announcement. The currency rose last week as some investors bet on a tightening.

The currency has been trading firmer than currencies of its trading partners for weeks. Even yesterday, estimates by Westpac Bank placed the trade-weighted Sing dollar 2 per cent firmer than the mid-point of theMAS policy band.

If the US dollar extends its downtrend against most major currencies, Sing-dollar forwards would price in a greater pace of appreciation for the local currency, thereby driving six-month swap-offered rates down.

'The onus will shift back to global risk appetite and hence funds flow,' said strategist Selena Ling at OCBC Bank.

The MAS, which reviews policy twice a year and will publish its next statement in April, manages the Sing dollar in an undisclosed trade-weighted band against a basket of currencies, instead of setting interest rates.

Inflation for next year is likely to be 1-2 per cent, from about 0 per cent this year.