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Currency falls on central bank warning

The New Taiwan dollar dropped nearly three-quarters of a percent against the greenback yesterday after the central bank showed its determination to prevent speculative attacks on the local currency, dealers said.

Declining for a second consecutive day after hitting a more than 10-year intraday high on Wednesday, the NT dollar closed NT$0.222 lower at NT$30.402 versus the US dollar on the Taipei Forex Inc. Turnover was US$1.845 billion, down from US$2.001 billion in the previous session.

Yesterday's 0.74-percent drop on the value of the NT dollar was the biggest since June 8, 2006, the foreign exchange's tallies showed.

To curb currency speculation, the central bank announced on Thursday that it would lower the reserve requirement ratio for foreign currency deposits to 0.125 percent, from 5 percent, effective on Tuesday.

At a press briefing following its quarterly board meeting on Thursday, the central bank warned of punitive measures against foreign funds that speculate on the local currency's rise.

``The market, of course, has heeded the central bank's latest message,'' a local currency trader, who requested anonymity, said by telephone yesterday.

"In addition to central bank intervention and US dollar purchases by insurance companies, there was some short-covering of US dollar non-deliverable forward contracts and repatriation of profits by foreign investors, which all helped drive the NT dollar lower," the dealer said.

Foreign institutional investors sold a net NT$9.11 billion in local shares yesterday. For the week, they purchased a net NT$43.09 billion, Taiwan Stock Exchange data showed, on speculation that president-elect Ma Ying-jeou (馬英九) would push for closer economic ties with China after he takes office on May 20.

Despite the recent pullback, the NT dollar will likely continue to appreciate in the long term thanks to the subprime mortgage crisis in the US and foreign capital inflows in anticipation of improved cross-strait relations, the dealer said.

But the local currency's appreciation pace may slow, judging from the close of offshore NT dollar/US dollar non-deliverable forward trading contracts yesterday, as the one-month discount narrowed to NT$0.090 from NT$0.180 in the previous session.

"Next week, the NT dollar is likely to trade between NT$30.0 and NT$30.5," he said.

Another local bank dealer, however, said the nation's economic fundamentals were not in good shape despite optimism after the election. Therefore, he sees no point to be that bullish on the NT dollar like other foreign currency traders.

"The market needs to pay extra attention on the hawkish stance adopted by central bank Governor Perng Fai-nan (彭淮南)," said the dealer, who also preferred not to be named.

"Perng has been at his post for almost a decade and he is known for his tight grip on the foreign exchange rate," th dealer said.

So far this year, the NT dollar has gained 6.3 percent against the greenback. In comparison, the central bank has only allowed the local currency to appreciate by 6.68 percent in the last two years as it must take into account the competitiveness of Taiwanese exporters.

The central bank has been under exporters' pressure as the recent NT dollar appreciation has raised concerns about the forex losses of local high-tech companies when these firms release their first-quarter financial reports beginning next week, the dealer said.
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