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US rate cuts increase pressure on NT

The central bank said the US Federal Reserve's interest-rate cuts have put pressure on the local currency, the best performing currency in Asia outside Japan this year.

"Taiwan is a small and very open economy. Foreign fund flows have put a lot of pressure on the currency," central bank Governor Perng Fai-nan (彭淮南) told the legislature's Finance Committee yesterday.

The Fed has lowered its benchmark lending rate 2 percentage points this year in an attempt to restore confidence in financial markets and avert a recession. The US rate of 2.25 percent is now 1.125 percentage points lower than Taiwan's key rate, attracting foreign cash to Taiwan's higher yields.

Perng said that funds flowing into Taiwan's equity market have also increased pressure on the nation's currency. He said that about NT$200 billion (US$6.6 billion) of recent inflows were tied to speculation that the currency would rise.

"I don't like hot money, but we've already opened our capital account," Perng said, referring to equity funds flowing in for speculation.

Perng said he will ask the Financial Supervisory Commission to check whether money that has entered Taiwan has been used for equity investment and not for currency speculation or placed in cash accounts. By law, investors must state the purpose for bringing money into the country.

The central bank said it saw heavy inflows from overseas yesterday and requested that funds be used for their intended purpose, seeking to deter speculation on the currency.

The bank made the request in a meeting with foreign funds and their custodian banks, it said in a statement on its Web site.

Perng also said the central bank's income this year may be hurt because falling global interest rates would lower returns on overseas investments.

"The Fed's recent rate cuts have put us under a lot of pressure," Perng said. "The bank has never encountered such a difficult situation."

"The central bank's projected NT$134.27 billion income will definitely be less than last year's, as the 3-year US bond market interest rate of 1.74 percent [as of last Friday] is lower than our budget foreign currency yield rate of 3.74 percent," Perng said.

If the NT dollar gains by another NT$1 against the US dollar, the bank will lose NT$10.5 billion.

For every increase of 0.25 percentage points on its rate, the bank's interest expenses will increase by NT$18.6 billion.

Losses incurred from both exchange rates and interest payments may total NT$60 billion this year.

The central bank said its income last year jumped 103.25 percent from a year earlier to NT$231.94 billion on increased foreign exchange reserves and interest revenue.
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