The local currency is likely to strengthen against the US dollar, although the struggling Japanese yen weighed down on the local currency last week, analysts say.
JP Morgan Chase Manhattan, an American investment bank, believes the NT dollar should strengthen on signs of recovery in the economy in the second half of the year.
In the near term, however, the currency may "weaken moderately" due to fragile market sentiment, according to the bank.
And Taiwan is not likely to allow the value of the local currency to drop much as it may hurt already-weak public sentiment, said Joan Zheng (鄭杏娟), the bank's senior economist for Greater China.
But a weaker currency is expected to help Taiwan's falling exports, which account for half of Taiwan's GDP.
Contrary to that widely-held mantra, Zheng said local policy-makers believe a weak currency "does not bring much net benefit" when demand for Taiwanese exports is weakening fast.
Unlike during boom times, buyers of Taiwanese goods abroad are not likely to order more just because the goods are rendered slightly cheaper by a depreciation.
Instead, any sharp drop in the value of the NT dollar would add to import costs and inflation, before it would boost exports -- a predicament that rules out the possibility that the central bank may let the NT dollar weaken to reverse falling exports.
Taiwan imports most of its raw material and components.
"However, the currency could weaken in the near future, given negative market sentiment," Zheng wrote in a research report on Saturday.
"The NT dollar has been outperforming the Japanese yen and Korean won by a significant margin, boosted by portfolio capital inflows in early 2001," the report said.
JP Morgan expects the NT dollar to trade between NT$32 to NT$33 to the US dollar in for the remainder of this year and next.
Conventional wisdom is challenged on the interest rate front as well.
While the consensus view is that interest rates in Taiwan will be cut further to help the domestic economy, Taiwan's policy-makers do not believe that "cutting interest rates" will stimulate domestic demand, the report said.
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