Sat, Nov 20, 2010 - Page 12 News List

Central bank rejects US Fed claims that NT is undervalued

By Ted Yang  /  Staff Reporter

The central bank yesterday reiterated that the New Taiwan dollar was not undervalued, in response to a prepared speech by US Federal Reserve Chairman Ben Bernanke to a conference in Frankfurt, Germany, which showed that the local currency’s real effective exchange rate (REER) had dropped over the past year.

The REER is used to determine a country’s currency value relative to other major currencies.

Citing a diagram provided by the Fed in the prepared speech posted on its Web site, the central bank said that the NT dollar’s REER appeared to have dropped 2.8 percent between September this year and September last year, which it said contradicted reality.

“Based on our own calculation, the REER of the NT dollar only fell 0.2 percent during that period,” Yen Tzung-ta (嚴宗大), head of the central bank’s economic research department, told a press briefing last night.

Yen said that calculations of the percentage change in the REER could vary substantially because of different comparison bases, adding that the rate even rose 4.4 percent between January last year and Thursday.

The Fed’s diagram showed that Taiwan and Hong Kong were the only two economies whose REER posted declines.

The central bank said that the REER should not be the sole basis for determining whether a country’s currency is undervalued as current fluctuations in exchange rate are mainly due to capital movements rather than changes in trade accounts.

In the prepared speech, Bernanke said that the failure of some emerging market economies with trade surpluses to allow their currencies to appreciate would aggravate the destabilization of volatile investment inflows.

“Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals,” the Fed chief said.

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