Photographer: Ashley Pon/Bloomberg
Mysterious Late Drops Stoke Taiwan Dollar Intervention TalkBy
Local currency seen paring gains shortly before end of trading
Central bank denies interference, says moves market-based
Fewer than two months after Taiwan was taken off the U.S.’s currency watch list, some observers are suggesting that the island’s central bank is getting more active in the foreign-exchange market.
Pronounced declines in the Taiwan dollar near the close of trading over the last two weeks have spurred speculation that the monetary authority is weakening the exchange rate to help exporters. The central bank denies intervention, with Harry Yen, director-general of its foreign-exchange department, saying the moves are determined by market forces alone.
For about a week in November, Taiwan’s currency strengthened beyond NT$30 against the greenback but slid sharply in late trade -- reminiscent of a pattern that had caught the U.S. Treasury’s eye in previous years. The exchange rate has gained 0.5 percent in the past month, compared with 1.7 percent for export rival South Korea’s won. This lag is due to “the usual reason of intervention,” according to Bank of Tokyo-Mitsubishi UFJ Ltd. The U.S. removed Taiwan from its list in October, saying the island is intervening less and meets only one of three criteria it monitors.
The U.S.’s assessment may have been too narrow, said Brad Setser, a senior fellow at the U.S. Council on Foreign Relations and a former deputy assistant secretary at the Treasury Department. “Even if the intervention is somewhat below the threshold, in the context of renewed intervention, I would have wanted to have kept Taiwan on notice,” he said. “As the heat has come off, my sense is Taiwan has reverted to its old pattern.”
Taiwan’s case shows the difficulty of policing currency intervention just as scrutiny of unfair trade practices is growing amid a worldwide backlash against globalization. The use of specific criteria has made the U.S. Treasury report seem fairer, while limiting its scope.
To Setser, Taiwan’s removal indicates weakness in the U.S. Treasury report. For instance, one of the criteria is a bilateral trade surplus with America, which understates Taiwan’s exports of electronics parts to the U.S. via China, he said. The report also ignores the jump in Taiwanese insurers’ partly unhedged foreign investments, which may be a form of hidden intervention, he added.
Taiwan’s central bank has been said to limit trading before the close and use state-backed banks to influence levels, thereby reducing actual reserve accumulation, a factor monitored by the U.S. The island has maintained smooth communication with the Treasury, and recent weakness in the Taiwan dollar is due to overseas investor outflows, central bank official Yen said. The currency closed at NT$30.02 against the greenback on Friday.
“Perng still on the watch -- what did you expect?” Cliff Tan, Hong Kong-based East Asian head of global markets at Bank of Tokyo-Mitsubishi UFJ wrote in a note, referring to Perng Fai-Nan, the island’s long-serving central bank governor.
“The Treasury has tremendous discretion about who it places on the watch list and the watch list doesn’t have to be limited to meeting two of the three criteria,” said Setser. “The Treasury should have sent a tougher signal.”