The New Taiwan dollar faces downward pressure against the US dollar on expectations that foreign investors will move funds out of Asia after the US Federal Reserve announced a gradual exit from quantitative easing, analysts said yesterday.
A significant drop in the NT dollar’s value on Thursday — a day after the Fed’s announcement — was evidence that the local currency was trending lower in line with other regional currencies amid fears of a possible further exodus of foreign funds, they said.
The NT dollar fell NT$0.035 to close at NT$29.980 yesterday, marking a new three-and-a-half-month low. It was the ninth consecutive session in which the local currency fell against the greenback.
Turnover totaled US$715 million during the trading session, down from US$746 million on Thursday, according to Taipei Forex Inc data.
The Fed announced after a two-day policymaking meeting on Wednesday that it would cut its monthly bond buying program by US$10 billion to US$75 billion next month. Of the cut, US$5 billion is purchases of Treasuries and the other US$5 billion is purchases of mortgage-backed securities.
However, the Fed said it will continue to maintain “exceptionally low” short-term interest rates until the jobless rate falls to about 6 percent or inflation exceeds 2 percent.
Norman Yin (殷乃平), a professor in the department of money and banking at National Chengchi University, said the move by the Fed to tighten its monetary policy is expected to prompt investors to park more and more of their funds in US dollar assets.
Michelle Tsai (蔡素菁), a Taipei-based economist at Jih Sun Securities Co (日盛證券), agreed.
“As the Fed tapers its stimulus gradually, funds will move from emerging to developed markets,” Tsai said. “No Asian economy will be able to avoid this, but places with higher foreign exchange reserves like Taiwan will be relatively resilient.”
Taiwan’s foreign exchange reserves climbed to US$415 billion this year, from US$403 billion in December last year, the central bank’s data show. That compares with US$266 billion in January 2007 before the onset of the global financial crisis.
This week, the NT dollar depreciated 1 percent against the greenback, the biggest weekly decline since the five days ending June 21, according to Taipei Forex Inc. The central bank will focus on preventing large fund outflows at next week’s quarterly board meeting, the Chinese-language Economic Daily News reported yesterday, citing unidentified government officials.
The central bank will announce its policy rate decision on Dec. 26, with all 25 economists surveyed by Bloomberg predicting borrowing costs would be kept at 1.875 percent. The overnight interbank lending rate was little changed this week and quoted at 0.386 percent yesterday, a weighted average compiled by the Taiwan Interbank Money Center showed.
A dealer with a government-invested bank who asked not to be named said foreign banks, local importers and life insurers placed more bets on the US dollar’s appreciation after the Fed’s moderate retreat from its fund injections.
In addition, the dealer said, as demand for the US dollar is on the rise with the year coming to an end, the NT dollar could test the NT$30 mark soon.