Over the past half year, the changing international situation, along with US President Donald Trump’s trade policies, have been posing big challenges to Taiwan in the form of a rising value of the New Taiwan dollar.
The NT dollar climbed 6 percent within a short time in the second half of the first quarter and this has had a large effect on President Tsai Ing-wen’s (蔡英文) government and Taiwan’s main industries.
Will the exchange rate reach the medium-to-high level of between NT$20 and NT$30 to the US dollar, or only experience a moderate gain of up to 10 percent before falling back to central bank Governor Perng Fai-nan’s (彭淮南) “defense line” of NT$33?
Taiwan has been wary of rashly intervening in the foreign exchange market ever since Trump took office.
The US’ half-yearly report on the foreign exchange situation is published in April, so Taiwan, which has twice found itself on the US Treasury’s monitoring list of countries that may be manipulating exchange rates, is now even more cautious of making any rash moves, for fear of getting on the wrong side of Trump.
There are also definite warnings coming from other developed countries. In March, the Organisation for Economic Co-operation and Development (OECD) warned that the turning of the US interest rate cycle in the middle of last year heightened risks of worldwide financial market volatility.
“The recent interest-rate rises have been associated with sizable exchange-rate movements, with the US dollar appreciating rapidly against the euro and yen, and a number of emerging-market currencies have faced market pressures,” the OECD said.
“Although risks may not materialize immediately, they remain a real possibility and a set of large shocks, possibly interacting with each other, would disrupt the recovery,” it said.
The US Treasury’s three criteria for placing major trading partners on its watch list are as follows:
First, the country in question has a bilateral trade surplus with the US amounting to more than US$20 billion.
Second, it has a current-account surplus equal to more than 3 percent of its GDP.
Third, it is engaged in persistent one-sided intervention in the foreign-exchange market, with the net purchase amount exceeding 2 percent of its GDP.
These assessment criteria basically continue former US president Ronald Reagan’s trade policy system, so they are a longstanding policy tool used by the US to manage its foreign trade relations.
The US dollar has strengthened year after year since 2012. Expressed in its real effective exchange rate index, the US dollar has considerably exceeded its five-year and 10-year moving averages, creating conditions for the US dollar to weaken and Southeast Asian currencies to strengthen.
In the period up to April 6, the NT dollar appreciated by 1.67 percent, while the Japanese yen and South Korean won rose by more than 2 percent. Even the Thai baht and the Singaporean dollar climbed by more than 1 percent, while the yen gained value against the US dollar for six days in a row.
While this trend is especially alarming for Taiwan, these countries have likewise been watching Taiwan carefully.
Considering that Taiwan’s policies that have long been focused solely on the US and adding in the Tsai administration’s policy of resolutely moving away from China, the nation will struggle to escape from this “curse of the three criteria” and the NT dollar will almost certainly be forced to gain value in line with the forces of the open market.
The important thing is that, with regard to fundamentals, Taiwan has huge foreign exchange reserves equal to nearly 80 percent of its GDP. This makes the NT dollar an internationally traded currency that can only gain value.
Bert Lim is president of the World Economics Society.
Translated by Julian Clegg
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