Renewed pressure on the Japanese yen and the last week's plunge on Wall Street may exert downward pressure on Asian currencies, including the NT dollar, officials said.
A series of recent negative developments may directly impact the local currency, which may reach NT$32.45 this week against the US dollar -- the level the currency hit in early March, local media quoted officials as saying.
Nevertheless, officials from the central bank said US dollar positions at domestic banks remain high, implying that downward pressure on the NT dollar may be limited.
Indeed, officials at the Council of Economic Planning and Development (CEPD) told Chinese-language newspapers over the weekend that structural weak-nesses in the Japanese economy may have a negative impact on Asia's exports, including Taiwan's own outbound shipments.
Most analysts generally agree. Exports from Taiwan are expected to drop this year due to "the global IT sector slowdown, which happens to coincide with the US manufacturing sector slowdown," said Paul Alapat, regional economist at Nomura Securities International.
The unnamed CEPD official even went as far as to say that the weakening yen may aggravate the already-burgeoning US trade deficit -- which may in the long run weaken the US dollar.
And if the US dollar weakens as a result, officials said that only China's currency may strengthen against other major currencies.
The central bank officials said that in light of the possible downward pressure on the NT dollar this week, they will keep a "close eye" on the developments in the foreign exchange market.
Last week's comment by the Japanese Finance Minister Kiichi Miyazawa that the Japan's fiscal position is on the verge of collapse pushed the Japanese yen below ?120 to one US dollar at on point -- although the currency recovered later in the week.
The yen's weakness put downward pressure on the local currency last week, as it hit 32.40 to the dollar. Taiwan's currency often mimics the yen, given the close trading ties between the two nations.
Taiwan imports the bulk of its electronic and machinery components from Japan.
Despite the reports of an expected economic slowdown this year, the NT dollar has largely been appreciating so far this year. Central bank officials said this was because the US economy is slowing at least as fast as Taiwan's. They also said that many importers bought "huge amounts" of currency forwards last year as a hedge.
Currency forwards are contracts bought at a given exchange rate to be exercised at a later date.
These contracts, purchased in November and December last year, are now providing importers with the necessary US dollars, while at the same time reducing the demand for dollars in the foreign exchange market.
Central bank officials also denied that the bank will use the depreciation of the NT dollar to stimulate exports. A policy of "dynamic stability" will continue to be maintained, they said.
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