N.T. Dollar May Depreciate Further by Year-End

Because the U.S. dollar is expected to retain its strength in the fourth quarter, Taiwan's N.T. dollar may continue to depreciate against the greenback, perhaps to the level of US$1=NT$34 or US$1=NT$35, according to some foreign banks.

The N.T. dollar began to accelerate its depreciation against the U.S. dollar in early September, closing at US$1=NT$33.77 on Oct. 24. So far this year, the local currency has dropped 5.49% in value against the U.S. dollar.


Market players predict the N.T. dollar will continue its slide during the remainder of the year. HSBC Bank International, for instance, predicts the local currency will stand at US$1=NT$34 at year-end, while BNP Paribas projects an even lower level of US$1=NT$35.

Two major factors lie behind the continuing strength of the U.S. dollar: the high differential between the U.S. interest rates and those of other nations, and the trend of homeland investment among U.S. enterprises.

The continuous moves by the U.S. Federal Reserve Board to raise federal funds rates have widened the interest differentials between U.S. interest rates and those of other nations, including countries in Europe, Japan, and Taiwan. The gap has prompted capital to flow from Japan to the U.S., leading to the devaluation of the Japanese yen against the U.S. dollar.

Moreover, in order to boost employment, the U.S. has passed the Homeland Investment Act (HIA), which sharply slashes the tax U.S. enterprises pay on their overseas earnings when the earnings are returned to the U.S., to 5.25%, from the existing 35%.

Morgan Stanley estimates that the total overseas earnings of U.S. enterprises will top US$418 billion this year, of which US$61 billion is likely to be sent back to the U.S., greatly boosting the strength of the greenback.

The retreat of U.S. capital from global markets has raised concerns among the central banks of Asian nations. Countries with high interest differentials with the U.S. and a sluggish stock market, such as Taiwan, will be more vulnerable to the impact of the trend.