NT dollar declining over cross-strait political fears

The New Taiwan dollar fell on speculation that any escalation in political tension with China will deter investment from overseas.

Li Weiyi (李維一), spokesman for China's Taiwan Affairs Office, said in a briefing on Wednesday that Taiwanese President Chen Shui-bian (陳水扁) is a "troublemaker" for saying Taiwan is considering scrapping its National Unification Council.

The NT dollar has risen 1 percent this year as global investors bought stocks. The council is an advisory panel set up by former president Lee Teng-hui (李登輝) on pursuing unification with China.

"Chen's comments may scare off some overseas investors," said Benson Liu, a Taipei-based currency trader at International Bank of Taipei (台北國際商銀).

"If tensions escalate, it may prompt foreigners to reduce investments. The NT dollar has room to weaken," he said.

The NT dollar fell 0.2 percent to NT$32.42 against its US counterpart yesterday, its weakest close since Jan. 3, according to Taipei Forex Inc.

The currency may decline to NT$32.50 this week, Liu said.

Chen said during a Lunar New Year speech on Jan. 29 that Taiwan should "walk our own way." Chen appointed new Premier Su Tseng-chang (蘇貞昌) on Jan. 19 to promote a tougher China stance and is trying to push a US$9.3 billion budget through Taiwan's legislature for the purchase of US arms.

China considers Taiwan a renegade province and claims it must be reunited, by force if necessary.

"Excess funds" net purchases of Taiwanese stocks by investors abroad were NT$1.1 billion (US$34 million) on Wednesday, less than a tenth of those on Feb. 7 and the lowest since Jan. 13, according to stock exchange figures.

Some investors abroad may also be taking cash out of the country in search of higher yields, Lo Chung, a currency trader at Shin Kong Commercial Bank (新光銀行) in Taipei said.

Interest-rate futures yesterday showed traders there's a higher chance of the US Federal Reserve boosting key interest rates in the coming months.

"The expectations of higher US rates may have prompted some investors to put their money in that country," Lo said.

"Foreigners may have brought home the excess funds they have after paying for purchases of Taiwan's stocks. The yield differential still favors US assets," he said.

Interest-rate futures show traders are pricing in a 92 percent chance -- up from 76 percent two weeks ago -- the central bank will raise the federal funds target rate to 4.75 percent at its next meeting on March 28.

The odds of a further quarter-point increase at the May 10 meeting rose to 54 percent, from zero percent last month.