The New Taiwan dollar yesterday closed at its highest level in more than five months after the central bank raised its benchmark interest rate on Thursday.
The NT dollar climbed NT$0.174 to close at NT$32.754 against the US dollar, the highest close since Jan. 9, Taipei Forex Inc data showed. The unit surged 1.2 percent this week, but is down 0.5 percent this year.
The central bank on Thursday lifted the discount rate on 10-day loans by 0.25 percentage points to 3.125 percent. The nation's borrowing costs compare with Japan's 0.5 percent, South Korea's 4.5 percent and the US Federal Reserve's 5.25 percent.
"With this rate decision, we can see the central bank's determination to support the currency," said Hideki Hayashi, a forex strategist at Shinko Securities Co in Tokyo. "A rate increase [that is] twice as much as expected may also lead to some unwinding of carry-trade positions, boosting the Taiwan dollar."
The stronger NT dollar also reflected the central bank's decision on Thursday to lift the reserve requirement ratio for foreign currency deposits.
It raised the reserve requirement ratio to 5 percent from 0.125 percent to discourage the holding of foreign currencies to prop up the sagging NT dollar.
In reaction to the central bank's move, major local lenders, including the state-owned Bank of Taiwan (台灣銀行), cut foreign currency depositary interest rates, especially those for high-yield foreign currencies, as a result of the higher cost of holding these currencies.
The Bank of Taiwan cut the US dollar one-year depositary interest rate by 0.26 percentage points to 4.34 percent from 4.6 percent, while keeping the depositary interest rate for Swedish krona and the Swiss franc unchanged.
Following suit, Taiwan Cooperative Bank (
The state-run Land Bank of Taiwan (
The nation's foreign currency depositary climbed to an all-time high of NT$1.9 trillion in April, the latest tallies provided by the central bank show.
"It's clear that Taiwanese policy makers are tired of seeing the currency's weakness," Hong Kong-based HSBC Holdings Plc strategist Richard Yetsenga said. "The government doesn't want to see an underperforming Taiwan dollar."
He predicts the currency will remain around NT$33 to the US dollar before declining toward the end of the year as carry trades resume. Taiwanese residents invested a net US$11.2 billion in offshore bonds and stocks in the first quarter, central bank data announced on May 21 show.
Enoch Fung (馮殷諾), a Hong Kong-based economist at Goldman Sachs Group Inc, said in a research note yesterday that the use of the NT dollar as a funding currency is turning less favorable.
Policy makers "now foresee a better growth outlook in the second half 2007, as they expect growth in Asia and Europe could help support Taiwan's export cycle," he wrote.
Fung forecasts an increase of 25 basis points in borrowing costs in September and a rise to NT$32 against the US dollar in 12 months.
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