The Bank of Japan and the European Central Bank last week kept their key interest rates unchanged. Both banks reiterated that their monetary stance remains accommodative and supportive, in an effort to curb market speculation about any possible policy tightening in the near future. The yen and euro strengthened because of central bankers’ positive remarks on the inflation outlook — an opportunity that investors could hardly miss.
While the currencies’ strength could also partly reflect an economic recovery in both Japan and the eurozone, it could complicate the monetary authorities’ efforts to unwind their easy-money policies any time soon.
The incident also showed that remarks by central bankers are closely watched by investors worldwide.
US Secretary of the Treasury Steven Mnuchin at the World Economic Forum in Davos, Switzerland, on Wednesday said that a weak US dollar was helpful for the country’s trade, which sent the greenback falling to its lowest level in three years. Although both US President Donald Trump and Mnuchin sought in the following two days to clarify their stance, the US dollar’s significant plunge in the week has two important implications: First, regardless of whether the trend of a weak US dollar is reversible, the currency market is likely to see acceleration in volatility; second, other countries could follow the US in a race to devalue their currencies, should economic protectionism prevail.
The New Taiwan dollar has strengthened by NT$0.747, or 2.5 percent, against the US dollar this month, roughly in line with the world’s major currencies’ more than 3 percent gains versus the greenback. As long as the currencies of the nation’s competitors are also appreciating, the NT dollar’s strength will not necessarily hurt local firms’ competitiveness or become a headache for government agencies, especially the central bank, which is to see Governor Perng Fai-nan (彭淮南) retire next month after the Lunar New Year holiday.
However, facing an unexpectedly prolonged weakness of the US dollar, the NT dollar has surged close to its strongest level in nearly five years, and if it keeps strengthening, it could hurt the nation’s exports, while encouraging more foreign “hot money” to flow into Taiwan, which is not what the central bank would like to see. Against this backdrop, maintaining the nation’s financial stability through appropriate foreign-exchange and interest rate policies is the first and foremost thing that any possible successor to Perng — including the most promising candidate, central bank Deputy Governor Yang Chin-long (楊金龍) — should keep in mind.
Perng used to say that the NT dollar’s exchange rate should be determined by market supply-demand dynamics, but in this US dollar-driven environment, the NT dollar seems to have no choice but to rise. With limited options in hand, implementing a unilateral intervention in the currency market to counter large gains in the NT dollar appears unavoidable.
However, it would require a candidate who is not only experienced in currency markets but also good at communicating with those outside Taiwan to handle the issue, because any effort by the central bank to significantly weaken the NT dollar’s value could easily put the nation on the US government’s watch list for currency manipulation again.
If market intervention is to remain a key part of the central bank’s arsenal, it would be no easy task for the incoming governor.
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