Taiwan’s dollar posted its biggest daily advance since December after a U.S. Treasury report hinted that the Biden administration could exert greater pressure on the island’s central bank to allow the currency to appreciate.
The local dollar rose 0.5% to close at 28.205 against the greenback, and was emerging Asia’s best-performing currency for the day. While the Treasury report on Friday didn’t label Taiwan as a currency manipulator, it said the U.S. 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 Ltd. “This, alongside the strong exports, will help support the Taiwan dollar.”
The Taiwan dollar has come under scrutiny as the tech-dependent economy posts a quicker recovery from the pandemic than most of its peers in Asia. Six of the 60 pages in the Treasury report were devoted to Taiwan, more than any other U.S. trading partner, in the Biden administration’s first foreign-exchange policy update.
The report cites research published in November 2018 that assesses the Asian currency to be undervalued by as much as 21%. Taiwan made net foreign-exchange purchases of $39.5 billion in 2020, equivalent to 5.9% of its gross domestic product, according to the analysis.
While Taiwan’s central bank doesn’t deny intervening in currency markets, it pushed back against aspects of the U.S. assessment. The Taiwan dollar is close to being at a balanced level based on the International Monetary Fund’s valuation model, it said, as it urged the U.S. to ease monitoring of trading partners during the Covid pandemic.
“Yellen is pragmatic and prudent,” central bank governor Yang Chin-long told lawmakers Monday, when discussing the Treasury report. “We need to show more than just our sincerity about communicating with the U.S.”
Taiwan has already held two meetings with the Treasury this year over its currency, Yang added. The central bank only intervenes when there are concerns about supply and demand in the market, he said.
Regular late-session moves by state-backed banks to pare gains by Taiwan’s currency against the dollar are “a kind of intervention,” Governor Yang had told reporters in late March. For months, the currency could rise more than 1% during the day, only to pare back most of the advance at the close.
While the U.S. didn’t label any economy as a currency manipulator, it also acknowledged that Taiwan, Switzerland and Vietnam all met the threshold. It insisted that it would maintain pressure on trading partners to redress trade imbalances with the U.S.
“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 Ltd. “The easing of U.S. 10-year bond yields and the retreat in the dollar of late has also helped the Taiwan dollar’s move.”