The latest GDP data released last week showed that the nation’s economy had a better-than-expected performance in the first quarter, rising 5.37 percent year-on-year. Taiwan’s external trade remains strong and domestic investment is in good shape.
However, the strong appreciation of the New Taiwan dollar against the US dollar since early last month has triggered an outcry from export-oriented businesses such as the machinery, chemicals, textiles, and information and communications technology sectors.
As local equities rose 4.6 percent in the first week of this month, recovering from a 2.23 percent decline for the whole of last month, it would be no surprise to assume that a short-term capital inflow is taking place and triggering the rise in the NT dollar versus the US dollar.
However, nothing has changed the central bank’s position on “hot money” inflows and the stability of the NT dollar, as long as the external risks confronting Taiwan’s economic future — mainly stemming from uncertainty over US President Donald Trump’s trade policies — remain in place.
As such, the central bank’s reaction on Friday — allowing the local currency to close the session at NT$31.064 against the US dollar, a level not reached since Jan. 9 last year, and seeing the local currency move up NT$0.953, or 3.07 percent, the largest single-session rise since 2002 — was unusual.
While the US dollar has over the past few weeks lost strength against most Asian currencies and the euro, the NT dollar’s appreciation by more than 3 percent and briefly surpassing NT$31 on Friday, having risen NT$1.462 or 4.71 percent last week, have simply caught many people off guard.
Some said that the central bank is willing to tolerate a stronger NT dollar, because it recognizes a surge of capital inflows chasing Taiwanese stocks and wants the local currency to rise that much in one go, hoping to pre-empt speculative foreign exchange trades driven by a large influx of hot money.
Others said this is essentially a restraint by the central bank to limit its market interventions amid the Taiwan-US trade talks and ahead of the US Department of the Treasury’s release of its semi-annual currency report.
Perhaps the recent strength of the NT dollar is also a result of growing market expectations of further appreciation amid reported pressure from the Trump administration, whereas moves by exporters rushing to convert US dollars to local currency and investors reassessing their greenback-based assets and hedging foreign exchange losses eventually aggravate the NT dollar’s recent revaluation.
Given that the NT dollar had risen 5.53 percent as of Friday since the beginning of this year, it is reasonable to assume that the strength of the local currency would remain solid in the near term and to expect the US dollar exchange rate to approach the psychological level of NT$30 in the coming days.
The central bank would likely be open to allowing the NT dollar to appreciate in the foreseeable future, even at a measured pace, which is why individuals and corporations, exporters especially, need to be aware of the possible consequences and learn how to deal with it — as long as Trump in his second term wants a weaker US dollar to help narrow the trade and fiscal deficits his country faces.
However, as a surge in the value of the NT dollar could exacerbate financial instability and affect corporations’ business performance, despite their efforts to hedge against foreign exchange risks, the central bank must continue to closely monitor the market situation, and ensure Taiwan’s money and foreign exchange markets operate in an orderly manner. Most importantly, the central bank needs to look for different ways to deal with the currency issue.
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