Taiwan's dollar may gain 4.2 percent by the middle of next year as the central bank will probably allow the currency to strengthen to curb inflation, UBS AG said.
The New Taiwan dollar advanced 3.3 percent in the past six months as policy makers increased interest rates for 13 straight quarters to temper the inflation rate, which rose to a 13-year high last month. A stronger currency helps to slow gains in consumer prices by making imports cheaper.
"I don't think hiking of interest rates will be enough and therefore it will become necessary for them to complement the hiking by allowing the currency to appreciate," said Nizam Idris, a currency strategist at UBS in Singapore.
"Inflation pressure is coming both from strong domestic demand and imported inflation from higher oil prices and foods," he said.
The NT dollar was little changed against the US currency. It traded at NT$32.348 from NT$32.350 yesterday morning, according to Taipei Forex Inc.
The currency may reach NT$31 by the end of next June, Nizam said.
The NT dollar may also draw support from expectations overseas fund managers will place more money into local shares and other assets, UBS said.
"Stock inflows have been quite strong," Nizam said. "It's likely to be sustained. Other potential inflows into Taiwan will come from China."
Fund managers outside Taiwan bought US$1.8 billion more of Taiwan's equities than they sold this year through yesterday, according to data from the stock exchange.
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