The New Taiwan dollar had its biggest decline in three months on concern funds abroad will take money from the country to invest in higher-yielding assets denominated in the US currency.
Taiwan's currency weakened after US Federal Reserve member William Poole suggested the US central bank will continue to raise interest rates on signs of inflation. The Fed's benchmark rate is 2.75 percent, compared with 1.875 percent in Taiwan.
"Any news to support faster rate increases encourages people to buy the dollar and sell the local currency," said Sadaaki Kondou, assistant general manager of the treasury department in Taipei at Mizuho Corporate Bank Ltd, a unit of Japan's biggest lender.
"This encourages capital outflow from the regional markets such as Taiwan," he said.
The NT dollar dropped NT$0.192 to close at NT$31.585, the biggest slide since Jan. 5, according to Taipei Forex Inc. Taiwan's currency may weaken to NT$32 this week, Kondou said.
Poole, Federal Reserve Bank of St. Louis president, said on April 2 investors correctly interpreted the Federal Open Market Committee's (FOMC) "increased concern" about inflation in its March 22 statement, which suggested the likelihood of additional rate increases.
"The statement emphasized the FOMC's increased concern over inflation, as evidence is accumulating that firms perceive an increase in their pricing power," Poole told a conference sponsored by the Center for Economic Policy Studies at Princeton University.
"The market reaction to that statement made a lot of sense and reflected my own assessment of a changing inflation environment," he said.
Investors abroad sold a net US$457 million of Taiwan's stocks since the start of last month through today, helping drive the local currency down 1.3 percent during the period. Investors bought a net US$3.64 billion of shares in February, according to stock exchange figures.
Goldman Sachs Group Inc and Merrill Lynch & Co last week said they raised their forecasts for Fed rate increases on concern that inflation is accelerating. Goldman increased its year-end forecast for the Fed's main rate to 4 percent from 3.5 percent. Merrill lifted its projection to 3.5 percent from 3.25 percent.
"When the dollar interest rate keeps going up, foreign investors will move funds away from Taiwan to the US markets," said Gary Huang, a currency trader in Taipei at Union Bank of Taiwan (聯邦銀行).
The currency may fall to near NT$31.70 this week, he said.
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