Oil and Interest Rates Weaken Taiwan Dollar

1. Summary. The New Taiwan dollar (NTD), along with other
East Asian currencies, depreciated significantly against the
US dollar (USD) June 29. Analysts blame high oil prices and
the market's expectation of higher US benchmark interest
rates. There are probably also seasonal factors affecting
the exchange rate. There was no apparent sign of capital
outflow as foreign portfolio investors continued to post net
stock purchases. End Summary.

NTD and Other Major Asian Currencies Weaken


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2. On Taiwan's foreign exchange (FX) market, the NTD lost
17.6 NT cents or 0.55% to close June 29 at a new low of
NT$31.61 per USD in the past two months and ten days. Other
major Asian currencies also fell against the US dollar. On
the morning of June 29, the Japanese yen dropped to an eight-
month low of 110.65 per USD in New York. In Seoul, the
Korean won declined to a four-month low of 1,026.3 per USD.

Primary Culprit: Higher Oil Prices


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3. With international oil prices rising to nearly US$61 per
barrel on June 27, businesses and analysts in Taiwan view
high oil prices as a significant challenge for export-
oriented and energy-thirsty East Asian economies.
Subsequent declines in oil prices to US$58.25 on June 28 and
further to US$57.62 the morning of June 29 did not relieve
pressure on the NTD and other Asian currencies. USD
exchange rates firmed up as the record high oil prices
seemed to indicate that high oil is here to stay for some
time.

Interest Rate Gap Expands Between US and Taiwan


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4. Another major cause for a weak NTD was FX market
observers' strong expectations that the U.S. Federal Reserve
Board of Governors (FED) would raise interest rates at its
June 30 board meeting and that Taiwan would follow suit.
These expectations came true as the FED increased its
benchmark rate by 25 basis points on June 30 and Taiwan's
Central Bank of China (CBC) raised its benchmark rate by
12.5 basis points. As of July 1, benchmark interest rates
in Taiwan are 1.25 percentage points lower than in the
United States.

Seasonal Factor: Settlement of Import Accounts


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5. There are also seasonal factors at work. FX traders
attribute part of the NTD depreciation to business firms'
obligation to settle their import accounts prior to the end
of Q2. US dollars bought by importers via foreign banks in
Taiwan on June 29 were estimated at US$600 million or one-
third of total FX trading volume that day.

Foreign Capital Remains in Taiwan


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6. Despite the depreciation, there is no apparent sign of
capital outflow. Foreign portfolio investors posted net
stock purchases on June 29, and cumulative net stock
purchases in June posted a new monthly high of NT$131.3
billion (US$4.15 billion at an exchange rate of NT$31.6 per
USD) as of June 29. However, their daily net purchases
shrank to NT$2.5 billion (US$80 million) on June 28 and
NT$1.16 billion (US$36 million) on June 29 down from NT$9.2
billion or US$292 million on June 27.

PAAL