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Government to defend NT dollar and stock market

Signs of a weakening economy, coupled with speculation that the central bank may devalue the currency, pushed both the currency and the stock market down sharply yesterday, triggering renewed fears of instability.

The New Taiwan dollar slumped to its lowest level in two and half years on reports that the central bank may abandon its defense of the currency in order to boost flagging exports.

But Hsu Yi-hsiung (徐義雄), central bank deputy governor, said yesterday afternoon that the central bank "will not let the NT dollar drop sharply and [will] intervene, if necessary," to stabilize the battered currency.

"Demand and supply in the market was affected by false reports, which resulted in the exchange rate volatility," Hsu said.

"We will not sit idly by," he said after the central bank let the NT dollar drop in the morning, triggering fears that the currency may depreciate further in the coming days.

The NT dollar plunged by as much as 1.5 percent to NT$33.45 against the US dollar, its lowest level since October 1998.

A report by the Taiwan Research Institute (台綜院), which recommended that the government devalue the currency by as much as 20 percent to NT$40 against the US dollar, has fuelled speculation that the currency may lose ground against the greenback.

Perng Fai-nan (彭淮南), central bank governor, said yesterday that the depreciation was caused by "abnormal expectations" in the foreign exchange markets. Asked about the report, Perng said that "economists should be careful when expressing their opinions to the public."

But institute president Liu Tai-ying (劉泰英) yesterday downplayed the policy recommendation, saying in a statement that he personally "didn't advocate the depreciation idea and ... never saw the report."

Despite yesterday's drop, econ-omists said the central bank may continue to maintain its grip on the currency, given its huge foreign exchange reserves and its famed neutrality.

"The central bank has a lot of control on the foreign exchange market," said Denise Yam, an economist who covers Taiwan for Morgan Stanley in Hong Kong. "They were not buying NT dollars as aggressively yesterday."

The NT dollar news also impacted the stock market's benchmark index, which fell 3 percent to 4,958.61.

"Retail investors are looking at the Taiwan dollar, which has broken the psychological level of 33 against the US dollar," said Neal Stovicek, strategist in the international department at National Securities Corp (建弘證券) in Taipei.

Following the decline in both markets yesterday, Minister of Finance Yen Ching-chang (顏慶章) said the ministry would be able to counter any irrational reactions in financial markets.

"We do not anticipate [it happening], but if the local stock market reacts irrationally [to the NT dollar fluctuation], the ministry will provide comprehensive measures to cope with the market's reaction," Yen said.

He failed to disclose any further details on how the ministry would achieve that goal.

Yesterday's sell-off in the stock market was inspired in part by the announcement that Morgan Stanley Capital International (MSCI), a global benchmark index provider, would cut Taiwan's weighting in its global benchmark indexes by almost a quarter of a percentage point from 0.69 percent to 0.44 percent, analysts said.

The news "is slightly negative," said Michelle Mak, head of research at ABN AMRO Securities' Taiwan branch.

But Markus Rosgen, regional strategist for ING Barings, believes that economic factors will be more important than the MSCI revision in determining stock prices.

"The weightings in the emerging market indices are not as good as hoped for by both institutional and retail investors," Stovicek said.
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