Strong NT Dollar Ahead Amid Trade Pressure and Fed Rate Cut Expectations
Currency analyst predicts US dollar will drop below New Taiwan dollar 30.
Let's get straight to it: The local currency is looking robust in the short term, and here's why.
According to Cathay United Bank's chief economist Lin Chi-chao, the US dollar is likely to dip below NT$30 due to anticipated trade pressure from the US, capital inflows, and expectations of a US Federal Reserve rate cut.
An Incredible Friday for the New Taiwan Dollar
Last Friday, the US dollar plummeted by NT$0.953, or 3.07 percent, closing at NT$31.064 – a level not seen since January 9, 2018. This massive single-day drop was the steepest since 2002.
Market Psychology and TAIEX Gains
The NT dollar's strength can be attributed to a few factors, including market psychology surrounding anticipated US policy pressure and the robust performance of the TAIEX. Significant foreign institutional net buying and optimism about a potential US Fed rate cut later this year have further fueled the NT dollar's rise.
The Plaza Accord 2.0?
Lin drew parallels to the 1985 "Plaza Accord," a deal between several leading economies that facilitated a coordinated weakening of the US dollar. Traders in the local foreign exchange market fear a similar situation could emerge from the current tariff negotiations, which have sparked concerns about additional pressure on Taiwan to allow the NT dollar to strengthen.
However, Lin suggests that the NT dollar's sudden surge may have been an overreaction to these concerns.
Long-term Outlook
Although Lin predicts that the US dollar could dive below the NT$30 mark in the short term, the NT dollar is expected to move in tandem with other Asian currencies in the long run, limiting its market outlier status.
Digging Deeper
As the potential for a US-Taiwan trade agreement is discussed amidst trade tensions and negotiations, it's essential to consider its impact on currency values.
An agreement could result in a TWD appreciation due to increased economic stability and investor confidence. However, a depreciation of the US dollar would depend on broader global economic factors rather than this agreement alone.
Granted, the US has yet to express any need for Japan to strengthen the yen during their tariff talks, as reported by the Chung-Hua Institution for Economic Research president Lien Hsien-ming.
As always, stay tuned for updates!
- The US Federal Reserve's rate cut expectations, combined with trade pressure from the US and capital inflows, are expected to push the US dollar (greenback) below NT$30.
- The strength of the local currency (NT dollar) is being fueled by significant foreign institutional net buying, optimism about a potential US Fed rate cut, and the robust performance of the TAIEX.
- Lin Chi-chao, Cathay United Bank's chief economist, has drawn parallels between the current trade negotiations and the 1985 Plaza Accord, suggesting a coordinated weakening of the US dollar could emerge.
- In the long run, the NT dollar is expected to move in tandem with other Asian currencies, limiting its market outlier status despite potential short-term dips below NT$30.
