The New Taiwan dollar retreated from a more than 10-year intraday high yesterday, ahead of the central bank's quarterly policymaking meeting.
The local currency ended its seven-day rise by dropping NT$0.170 to close at NT$30.180 versus the US dollar yesterday. Turnover was US$2.001 billion, up from US$1.858 billion the previous day, Taipei Forex Inc figures show.
Outward remittances by foreign investors and central bank intervention were spotted, though short-covering of the US dollar by foreign banks also appeared, dealers said.
Following the close of the forex market, the central bank announced that it was raising its benchmark interest rate for the 15th straight quarter to 3.5 percent, effective today, to contain inflationary pressure.
A currency dealer at the Union Bank of Taiwan (
"It is just a symbolic move by the central bank in its effort to combat inflation," the dealer, who preferred to remain anonymous, said by telephone.
"The future direction of the NT dollar will largely depend on how well the central bank can tolerate the local currency's recent appreciation,as well as the nation's economic fundamentals," the dealer said.
While expectations that the NT dollar will continue to strengthen are high, the local currency is facing a short-term correction as it has appreciated NT$2.263, or 6.98 percent, since the beginning of this year, the dealer said.
"The nearly 7 percent rise in the NT dollar's value to date this year is probably beyond what the central bank can withstand," the dealer said. "In our experience, Governor Perng Fai-nan (彭淮南) can tolerate an average annual rise of between 4 percent and 5 percent in the NT dollar's value at the most."
The NT dollar ended weaker yesterday, in line with the benchmark TAIEX's plunge as major institutional investors turned bearish during the session.
Foreign investors sold a net NT$25.6 billion in local shares yesterday, ending three days of consecutive net purchases of NT$77.8 billion, the Taiwan Stock Exchange's tallies showed.
Despite the pullback, JPMorgan Chase & Co forecast yesterday that the NT dollar may see its sharpest rise in more than two decades this year if stocks were to regain momentum on speculation that the new government would improve ties with China.
The currency could gain 3.9 percent to NT$29 per US dollar by Dec. 31, said Claudio Piron, head of Asia foreign-exchange research at the US' third-largest bank.
"Everybody took China to be a threat and taking business away from Taiwan and so, this is an almost 180-degree shift in the thinking," Piron said in Singapore. "Equity inflows are the key contributor to the appreciation of the Taiwan dollar."
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