Taiwan dollar gains as US hints at currency valuation pressure

[TAIPEI] Taiwan's dollar rose to its highest in a month, outperforming Asian peers, after a Treasury report hinted US officials could exert greater pressure on the island's central bank to allow its currency to appreciate.

The Taiwanese currency rose as much as 0.5 per cent to 28.196 against the greenback, its strongest since March 16.

The Treasury report on Friday didn't label Taiwan as a currency manipulator but said the US will initiate "enhanced bilateral engagement" to address what it considers as "structural undervaluation" of the exchange rate.

"Despite the relief of not being labeled a currency manipulator, the Treasury report still urged Taiwan authorities to limit FX intervention to exceptional circumstances," said Ken Cheung, chief Asian FX strategist at Mizuho Bank. "This, alongside the strong exports, will help support the Taiwan dollar."

The Treasury report cites research published in November 2018 that assesses the Asian currency to be undervalued by as much as 21 per cent, giving a rough guide to the scale of appreciation the US would deem appropriate.

Six of the report's 60 pages were devoted to analysis of and recommendations for Taiwan, more than any other trading partner, signalling the importance it attaches to the value of the Asian currency.

While Taiwan's central bank doesn't deny intervening in currency markets, it pushed back against aspects of the US assessment in a statement Sunday. It also urged the Treasury to ease its monitoring of trading partners for currency manipulation during the ongoing Covid pandemic.

The Treasury used Taiwan dollar's spot rate versus the greenback to determine how much it was undervalued by, rather than the real effective exchange rate it used for other partners, the central bank said.

Taiwan's currency is close to being at a balanced level based on the International Monetary Fund's valuation model, it said.

"Yellen is pragmatic and prudent," Taiwan's central bank governor Yang Chin-long told lawmakers Monday. "We need to show more than just our sincerity about communicating with the US."

Taiwan has already held two meetings with the Treasury this year over its currency, Mr Yang added.

TAIWAN IN FOCUS

The Taiwan dollar is Asia's best performer so far this year with gains of 0.4 per cent, bolstered by overseas demand for exports from the likes of Taiwan Semiconductor Manufacturing Co.

Taiwan made net foreign-exchange purchases of US$39.5 billion in 2020, equivalent to 5.9 per cent of its gross domestic product, according to the Treasury's analysis.

The US report reiterated calls for Taiwan's monetary authority to refrain from intervening in foreign-exchange markets except in exceptional circumstances.

The US didn't label any economy as a currency manipulator in the Biden administration's first report published Friday, despite acknowledging that Taiwan, Switzerland and Vietnam all met the threshold.

It insisted that it would maintain pressure on its trading partners to redress trade imbalances with the US.

"There will still be pressure on Asian central banks to ease back on their intervention activity, which would lead to greater appreciation pressure," said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. "The easing of US 10-year bond yields and the retreat in the dollar of late has also helped the Taiwan dollar's move."

BLOOMBERG