Taiwan Dollar Approaches Level It Hasn't Breached in 25 Years

(Bloomberg) -- Buoyed by booming exports, the Taiwan dollar is rallying in another attempt to crack a level that has held for almost 25 years. It may face stiff resistance.

Taiwan’s policy makers could slow the currency’s gains as it approaches 27.501 per greenback, a level it last reached in March 1997. An impending lift-off in U.S. interest rates may also curb the local dollar’s advance.

The currency’s rise could put Taiwan dollar bulls on the collision course with the central bank, which frowns on excessive gains that could hurt exports. The authorities have started intervening again after refraining since March, with state-backed banks buying the greenback at end-2021 and earlier this week, according to Taipei-based traders.

“While policy makers have allowed for market forces to play a greater part in the Taiwan dollar’s levels, they will step in if they find excess volatility,” said Christopher Wong, senior foreign-exchange strategist at Malayan Banking Bhd. in Singapore. 

The central bank only “smooths” currency volatility when there is a large move, and foreign inflows have helped drive the local dollar’s strength this week, Eugene Tsai, the monetary authority’s director general of the Department of Foreign Exchange, said Wednesday. He declined to say if the authorities intervened this week.

The Taiwan dollar slipped 0.1% to around 27.7 at midday on Friday after registering its strongest close since April 1997 on Wednesday. Maybank expects it to drop to 28 by year-end while Australia & New Zealand Banking Group Ltd. sees it weakening to 27.8 by March 31. 

Still, some others note that the central bank may tread lightly in the run-up to the release of the U.S. Treasury Department’s foreign-exchange policy report.

“We will see in the first quarter whether central bank officials can keep up their ‘no intervention’ practice since last March before the U.S. Treasury report which will be out in April,” said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. “Taiwan will not want to be named a manipulator. So they will want to stay quiet especially before the next report.”

Taiwan, along with Switzerland and Vietnam, dodged the currency manipulator label in the Treasury Department’s FX report released last April, even as the three economies met the criteria.

The local dollar may take its next cue from a report due Friday, which is forecast to show the island’s exports grew 26.4% in December from a year earlier, after rising 30.2% the previous month.

Fed Factor

Intervention aside, the Taiwan dollar also faces external pressure. Demand for risk assets is likely to wane after minutes from the Federal Reserve’s December meeting pointed to an aggressive pace of tightening.

“With the Fed expected to lift rates this year, the higher U.S. yields could lead to greater volatility and impact equity flows into Taiwan, affecting the currency,” said Khoon Goh, head of Asia research at ANZ in Singapore. 

After the Fed raises borrowing costs, the Taiwan dollar is likely to return to the 28 levels by the end of this year, said Eupho Lin, Cathay United Bank Co. chief economist in Taipei.

Forecasts (per dollar):

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