SINGAPORE/MUMBAI (Reuters) - Singapore widened the trading band for its currency in response to increasing market volatility and India intervened to temper a rising rupee as foreign exchange tensions persisted ahead of a key G20 meeting.

A general view of Singapore's financial district from Merlion Park April 14, 2010. REUTERS/Tim Chong

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

Emerging nations 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 exports.

In response, several governments have stepped into foreign exchange markets or tried to curb capital inflows, raising fears of a currency “race to the bottom” that may trigger protectionism and hobble global growth.

India’s central bank bought dollars around 44.10 rupees on Thursday, dealers said, in what is thought to have been its first such intervention this year.

The Reserve Bank of India has been reluctant to intervene in currency markets but may be forced to again as foreign investors are expected to pour in billions of dollars to buy shares in the country’s largest ever IPO, for Coal India.

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.

DOLLAR HITS NEW LOWS

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.

That 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.

The dollar extended losses versus the euro after data showed U.S. initial jobless claims rose more than expected.

Underscoring the currency 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.

Seoul was angered by unusually direct remarks on Wednesday by Japanese Finance Minister Yoshihiko Noda, who said emerging market countries with current account surpluses, like China and South Korea, should allow their currencies to be more flexible.

“It is inappropriate to talk about a certain country’s foreign exchange policy unilaterally,” Bank of Korea Governor Kim Choong-soo told reporters.

Japan itself intervened in the currency market last month for the first time in more than six years to try to stem a rise in the yen that threatens its fragile economic recovery.

The next flashpoint will come on Friday, when the U.S. Treasury is expected to make a ruling on whether China is deliberately manipulating its exchange rate -- a move that would enrage Beijing and make the prospect of any accord on currencies even more remote.

The United States has not formally branded China a currency manipulator since 1994 and a ruling against it would be a shock despite growing anger from U.S. politicians who accuse Beijing of “stealing jobs” by keeping the yuan artificially cheap.

Federal Reserve Chairman Ben Bernanke will deliver a keynote speech on monetary policy which will be pored over for signs he is about to restart the money printing presses, a move China and others say will flood the world with more liquidity, weaken the dollar and push emerging currencies yet higher.

The Chinese central bank, which keeps the yuan’s exchange rate on a short leash, let the currency creep up on Thursday to 6.6562 per dollar, the highest level since it abandoned a decade-old peg to the U.S. currency in July 2005.

Visiting Beijing, Senate Finance Committee Chairman Max Baucus said the upper chamber was poised to follow the House of Representatives and pass legislation to correct the undervaluation unless Beijing acted.