The Singapore dollar fell against the US dollar yesterday amid reports that the Sultanate of Brunei's largest company, Amedeo, had collapsed with debts of up to GBP10 billion (about HK$127.59 billion), potentially putting the oil-rich economy under considerable strain.

Due to a fixed exchange rate between the rarely traded Brunei dollar and the highly liquid Singapore dollar, investors targeted the latter on fears that a financial meltdown in Brunei could break the currency link.

Traders said the ramifications of an Amedeo collapse could also threaten political stability in Brunei, as the company is controlled by Prince Jefri Bolkiah, the younger brother of Sultan Hassanal Bolkiah.

After no official confirmation or denial of the reports, traders said the Singapore dollar took a sharp hit, dropping more than a cent to S$1.717 as investors sold it as a proxy hedge for the Brunei dollar.

'This is a sentiment knock,' Mitul Kotecha, treasury economist at Standard Chartered, said.

He said the lack of any follow-through buying meant the market did not seriously consider any danger to the real economy of Brunei, but clearly showed how vulnerable the market was to negative news.

'No one is quite sure what the real effect would be . . . but this sort of news does not help markets,' Mr Kotecha said.

Brunei has experienced significant political and economic turmoil during the past few weeks, with the government proclaiming that although it could meet its financial obligations, it was appointing a special economic council to assess the economy.

The poor performance of oil markets, which have seen Brent crude prices drop to 12-year lows, is thought to have damaged the economy and hastened a drive by the government to diversify further. The regional financial crisis is also thought to have had knock-on effects on the economy.

Last month, a veteran cabinet and former law minister resigned as the office came under prime ministerial control.

The law minister, Pengiran Bahrin Haji Abbas, also held senior positions at Royal Brunei Airlines, Brunei Islamic Trust Fund and the Islamic Bank of Brunei.

Prince Jefri is thought to have encountered significant financial problems, highlighted by a restructuring of some of his best-known assets in Britain, including the merger of the Royal jewellers Asprey and Garrards.

He is reported to be under pressure from his older brother to clean up the mess, but several key executives are said to have left Brunei.