Despite the central bank's efforts to slow the appreciation of the local currency, Goldman Sachs Group Inc forecasts that the NT dollar will strengthen to NT$28.5 versus the US greenback in the next twelve months.
"We foresee more upside in the [NT dollar], especially given our view of further depreciation of the US dollar and a potential revaluation of the yuan," Goldman Sachs' economist Enoch Fung said in a report released last week.
"While the movements of the [US dollar] and regional currencies are important, we believe the strength in Taiwan's own domestic reflation cycle augurs well for a stronger exchange rate," Fung said.
Over the next six months, Goldman Sachs expects the NT dollar to rise to NT$30.0 versus the US dollar, up from a previous forecast of NT$31.5.
The analyst said that the appreciation would likely benefit importers more than it would hurt exporters.
"In fact, we found that the state of global demand is a more overwhelming determinant of export growth than the [real exchange rate]," Fung said.
NT dollar appreciation could be a key catalyst to a more entrenched domestic reflation cycle, which is bolstered by the positive outlook for export growth and broad-based recovery in capital expenditure that would in turn gives a stronger boost to the labor market and consumption, he added.
"Therefore, we expect policy makers to gradually become less resistant to an appreciation of the exchange rate," Fung said.
The NT dollar rallied to NT$31.091 against the greenback last Thursday, the highest level since September 13, 2000, closed unchanged at NT$31.175 last Friday on speculation about the central bank's intervention.
In a bid to ease the currency's appreciation driven by the foreign capital inflows, the central bank on Friday urged foreign portfolio investors to invest in the local stock market money they have already remitted to Taiwan and converted to NT dollars, but which has been kept on the sidelines.
“A small number of foreign investors did not purchase stocks after their funds had been converted into NT dollars ... the size of NT dollar funds hoarded by some foreign investors appears to be rather excessive,” the bank
Even so, the trend towards appreciation appears to be inevitable, as foreign financial institutes have cast their bullish projections for the rising NT dollar in droves in the past few months.
Lehman Brothers Bank made the most aggressive prediction earlier last month, saying that the local currency is likely to soar to NT$26 against the US dollar by the end of this year. Morgan Stanley's chief economist for China
and Asia, Andy Xie (謝國忠) expects the NT dollar to rise to NT$28 in that time.
Citigroup posted a more conservative projection last month that the nation's currency could be traded at NT$32 versus the US dollar on average this year and at NT$27 in the five years to come.