If Japanese currency continues to weaken against the US dollar, the New Taiwan dollar is likely to test NT$33 in the short term, analysts say.
The local currency closed at NT$32.979 on the foreign exchange market Wednesday, down from Tuesday's close of NT$32.9.
The currency fell to its lowest level against the greenback this year amid strong offshore buying of US-dollar non-delivery forward contracts, which was triggered by escalating tensions between US and China and expectations of a further depreciation of local currency, dealers said.
The local market was closed yesterday due to a national holiday while the currency was little changed in limited activity in the offshore market, trading at around NT$32.98 for a US dollar.
The NT dollar has been falling as the Japanese yen weakens on concern the world's second-biggest economy may slide into recession and as Japan's allow the weakness to boost export growth.
Dealers said they expect the NT dollar to break through the NT$33 level when the forex market resumes operations today.
"If the yen depreciates further there will be pressure on the Taiwan dollar," said Eric Jen, who helps manage US$2.3 billion in investments at Grand Pacific Securities Investment Trust Ltd (中信投信).
"The Taiwan dollar hasn't depreciated much recently because the bulk of depreciation occurred last year as money was invested in mainland China and the stock market fell. The central bank has also been intervening," Jen said. The analyst stressed that the future trend of the Taiwan dollar depends on the Japanese yen as Japan competes with Taiwan in export of IT goods.
"I see the yen depreciating further this month to ?130 versus the US dollar. I see the [New] Taiwan dollar breaking 33 against the US dollar," Jen said.
For the past 12 months, the NT dollar has followed the yen, with a daily correlation of 0.863, according to Bloomberg analytics. A value of 1 means the two currencies move in tandem.