The New Taiwan dollar rose to the highest close against its US counterpart in more than four years on speculation exporters increased purchases of the currency before the end of the month.
The local currency also strengthened on optimism foreign investors will continue to buy the nation's stocks, dealers said.
The NT dollar rose for a seventh day, gaining NT$0.054, or 0.2 percent, to close at NT$31.976 in Taipei. It was the strongest close since Oct. 13, 2000.
Turnover was US$724 million yesterday, up from US$684 million the previous day.
The local currency opened the morning session at NT$32.082 against the greenback, amid speculation that the nation's central bank was selling the local currency while buying the US dollar to stop the local unit's appreciation.
But the NT dollar later turned strong against the US dollar after exporters dumped the US currency as well as the strong capital inflows by overseas investors that pushed the benchmark TAIEX up more than 100 points before noon, dealers said.
"There is demand for NT dollars from exporters because it's the month-end," said Noriyoshi Tsunoda, assistant general manager of the treasury department in Taipei at Mizuho Corporate Bank Ltd, a unit of Japan's biggest lender. "Capital inflows to Taiwan are also supporting the local currency."
The NT dollar may rise to NT$31.95 versus the greenback this week, Tsunoda said.
Investors abroad yesterday bought a net NT$8.52 billion (US$266.5 million) of Taiwan's shares. They were net buyers for 12 days, acquiring a total of NT$39.1 billion of equities.
"Amid the current strong sentiment for Asian currencies, including the NT dollar, a relatively high growth target is supportive for Taiwan's currency," said Osamu Takashima, chief analyst in Tokyo of the foreign exchange and treasury division at Bank of Tokyo-Mitsubishi Ltd.
The currency may strengthen to around NT$31.50 against the dollar in two weeks or so, he said.
To keep inflation in check and support its currency, the nation's central bank may raise its key interest rate for the second quarter in a row, economists said.
Policymakers may increase the discount rate on 10-day loans to commercial lenders from 1.625 percent at their quarterly meeting yesterday, according to five of nine economists in a Bloomberg News survey. Four predicted a quarter-point move, and one forecast the rate would rise by an eighth of a point.
The central bank on Sept. 30 increased the rate for the first time in four years, by a quarter-point, after record crude oil prices spurred inflation.
"The central bank is unlikely to allow local rates to lag behind their US counterparts and the currency to suffer," said Prakash Sakpal, an economist at ING Bank in Singapore.
But another economist disagreed, citing that consumer prices rose 1.5 percent in November from a year earlier, easing from gains of 2.4 percent in October and 2.8 percent in September.
"There is no need for the central bank to change rates now as it has let the NT dollar appreciate, which prompted import price declines to ease inflation pressure," said Daniel Chen, chief economist at SinoPac Financial Holding Co (