Politics

Local currency experiences volatility

• Publication Date：03/19/2010
• Source： Economic Daily News

The Central Bank of the Republic of China acted to counter speculative trading by “hot money” on the local foreign exchange market as the New Taiwan dollar rose sharply in early trading March 18.

Aggressive last-minutes purchases of the U.S. dollar by the CBC led the NT dollar to decline NT$0.078 to finish Thursday at NT$31.825 against the greenback, reversing from an intraday high of NT$31.667. Turnover amounted to US$1.225 billion, unidentified forex dealers said.

The local unit already hit an 18-month high March 17, driven by the recent government go-ahead on cross-Taiwan Strait financial regulations, prospects of an economic cooperation framework agreement between Taipei and Beijing, and market anticipation of surges in the Chinese yuan. Speculative foreign funds further boosted the local unit past the NT$31.7 level in intraday trade March 18.

The recent rally in the NT dollar has caused concern among exporters, who are eager to learn the best timing to dispose of their U.S. dollar holdings in order to curb possible forex losses.

It was difficult for the local currency to fall, given expectations of an upswing in line with the yuan, forex dealers explained. Weakness in the U.S. dollar on the global front powered more foreign capital influx, lifting the NT dollar at the opening bell March 18. “No one knows whether it will keep rising straight to NT$31,” they added.

Such worries could be justified by the inflow of hot money to NT dollar-denominated deposits, purchases of government bills and collateral against stocks short sale. Besides calling for self-restraint by foreign investors, there was little the central bank could do to defend the local forex market from such speculation.

However, the central bank fought back eventually. The NT dollar was traded at NT$31.695 against the U.S. dollar about 15 minutes before closing. Strong moves by the CBC caused a fluctuation of NT$0.13 in the last minutes, successfully dragging the finishing level to NT$31.825.

According to bank forex dealers, the central bank had no choice but to act as it did. With the end of the month approaching, exporters have been unnerved by the recent rate volatility. Should exporters sell their U.S. dollars, the NT dollar would surge even higher.

Dealers said the local currency could move in the range between NT$31.7 and NT$31.8 in the near term as the central bank has now acted against market speculation. (HML-THN)