Pundits say NT dollar is safe, for now

The nation's central bank said that the exchange rate of the New Taiwan dollar depends on the market supply and demand, in the wake of China announcing last night that it will allow its currency to fluctuate against a basket of currencies and end its decade-old fixed-exchange rate against the US dollar.

"The central bank will not step in unless abnormal market expectations distort the free-market mechanism," the Central News Agency cited George Chou (周阿定), the director general of the central bank's currency department, as saying yesterday.

Chou's comments came after the People's Bank of China announced last night on its Web site that it will allow the Chinese yuan to appreciate by 2 percent, which would revalue the currency against the US dollar to 8.11, up from 8.28.

The NT dollar yesterday rose NT$0.048 to close at NT$31.953 at the Taipei foreign-exchange market at 4pm, well before China's yuan-revaluation announcement.

While the central bank appeared to downplay the possible impact of the revaluation, Cheng Cheng-mount (鄭貞茂), chief economist of Citigroup in Taipei, said he expected the central bank to adopt a wait-and-see attitude on fluctuations in the NT dollar's value today.

But Cheng said the revaluation of the yuan's value is minimal and, accordingly, is not expected to have an impact on Taiwan's economy.

"The two-percent appreciation is the result of a compromise under US pressure, as China thinks such a narrow range of revaluation is bearable in light of its stunning economic growth of 9.5 percent in the first half [of this year]," Cheng said.

"Basically, I think the sudden move has been made to test the market's acceptance of the yuan's appreciation and reduce trade friction with the US," Cheng said.

With economic growth still on the track and a trade surplus amounting to US$70 billion, China can afford to lose a bit in exports in order to gauge market reaction before further appreciations, Cheng said. The recent strength of the US dollar is also a factor that influenced Beijing's decision at this time, he said.

Echoing Cheng, Kung Ming-hsin (龔明鑫), an economist at the Taiwan Institute of Economic Research (TIER, 台經院), said the minimal appreciation was just a test of the market to avoid a sudden, huge inflow of hot money and he expected China to further relax its peg to the greenback before the year's end.

TIER forecasted a 10 percent revaluation for the Chinese yuan against the US dollar.

For the time being, the NT dollar may only strengthen by less than 2 percent against its US counterpart to offset the recent declining momentum, unless the Japanese yen soared to considerable heights, the economist said.

But the nation's currency would be subject to much heavier appreciation pressure should China further relax its currency policy, Kung said.

Tseng Chu-wei (曾巨威), professor of public finance at National Chengchi University, however, said that the New Taiwan dollar has been flexible against other currencies.

"The yuan is just returning to its normal market price under pressure, especially from the US. Unless the yuan shows more movement in the near future, the NT dollar will not be affected," he said.

The slight revaluation of the yuan may have little impact on Taiwan's economy, but local stock and foreign exchange markets may experience turbulence after the abrupt move, Citibank's Cheng said.