Janet Yellen, US President Joe Biden’s nominee for US secretary of the Treasury, on Tuesday last week said at her US Senate confirmation hearing that the US does not seek a weaker currency to gain a competitive advantage, adding that foreign countries manipulating their currencies was “unacceptable.”
However, Taiwan’s central bank has said that national interest takes precedence over its wish to avoid currency manipulation charges by the US, as a strong New Taiwan dollar is unfavorable for Taiwan’s export-oriented economy.
The nation’s foreign-exchange reserves rose to a record US$529.91 billion as of the end of last month, up 10.83 percent, or US$51.79 billion, from a year earlier. Strong exports in the past year produced trade surpluses that added to Taiwan’s foreign-exchange reserves, and the central bank continued to buy US dollars to slow the local currency’s appreciation.
The NT dollar has repeatedly challenged a 23-year high of NT$28 during intraday trading amid rapid, massive capital inflows, prompting the central bank to step into the market to curb the currency’s advance.
Market watchers have said there are signs that the US dollar might continue to fall for some time, meaning that the appreciation pressure on the NT dollar would remain. As the central bank is aware of the cost of artificially reining in the soaring currency, it has repeatedly called on the public and exporters to refrain from selling US dollars.
On the one hand, the central bank has over the past few weeks asked custodian banks to exercise restraint in trades and pleaded on Facebook that a stable exchange rate is favorable for all, while on the other, it has stepped up investigations into some firms’ alleged involvement in currency speculation.
On Thursday last week, the central bank said that eight grain merchants have engaged in currency speculation totaling US$11 billion since July 2019 under the guise of routine currency transactions, which has affected the stability of the nation’s foreign-exchange market.
The central bank said it would punish four unnamed foreign banks for helping the merchants speculate in NT dollar-deliverable forwards in contravention of foreign-exchange regulations.
While maintaining the stability of the NT dollar’s exchange rate is important, the costs are high for the central bank in terms of daily purchases of US dollars, the moral persuasion of banks and probes into foreign banks in the deliverable forwards market.
In light of persistent fund inflows, government agencies — such as the ministries of economics, finance and the interior, as well as the National Development Council — should draw up plans to take advantage of the strong NT dollar, such as channeling the abundant capital to the real economy and investing in activities that would reinvigorate the struggling middle class and young people.
In the face of loose monetary policies, including quantitative easing by the US Federal Reserve and other central banks, emerging economies such as Taiwan’s are inundated with large capital inflows, which lead to severe challenges, such as high exchange-rate appreciation, inflationary pressure and asset bubbles.
No one knows when the bubbles might burst, but the possibility of going in the direction of collapse always exists, as too much money could result in miserable money games for people.
Government officials have begun to call on investors to pay attention to risks, which is a good sign for the market in the short term.
However, in the long run, implementing structural reforms to the economy and the tax system are necessary to narrow the wealth gap, boost employment, alleviate the pressure on the NT dollar and avoid any harm that could be caused by excess liquidity.
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