US embassy cable - 05TAIPEI2868

UNCLAS SECTION 01 OF 02 TAIPEI 002868 
 
SIPDIS 
 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OMA 
 
USTR FOR Audrey Winter and Tim Wineland 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHDATER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, PINR, TW, Finance 
SUBJECT:  Oil and Interest Rates Weaken Taiwan Dollar 
 
1.  Summary.  The New Taiwan dollar (NTD), along with other 
East Asian currencies, depreciated significantly against the 
US dollar (USD) June 29.  Analysts blame high oil prices and 
the market's expectation of higher US benchmark interest 
rates.  There are probably also seasonal factors affecting 
the exchange rate.  There was no apparent sign of capital 
outflow as foreign portfolio investors continued to post net 
stock purchases.  End Summary. 
 
NTD and Other Major Asian Currencies Weaken 
------------------------------------------- 
 
2.  On Taiwan's foreign exchange (FX) market, the NTD lost 
17.6 NT cents or 0.55% to close June 29 at a new low of 
NT$31.61 per USD in the past two months and ten days.  Other 
major Asian currencies also fell against the US dollar.  On 
the morning of June 29, the Japanese yen dropped to an eight- 
month low of 110.65 per USD in New York.  In Seoul, the 
Korean won declined to a four-month low of 1,026.3 per USD. 
 
Primary Culprit: Higher Oil Prices 
---------------------------------- 
 
3.  With international oil prices rising to nearly US$61 per 
barrel on June 27, businesses and analysts in Taiwan view 
high oil prices as a significant challenge for export- 
oriented and energy-thirsty East Asian economies. 
Subsequent declines in oil prices to US$58.25 on June 28 and 
further to US$57.62 the morning of June 29 did not relieve 
pressure on the NTD and other Asian currencies.  USD 
exchange rates firmed up as the record high oil prices 
seemed to indicate that high oil is here to stay for some 
time. 
 
Interest Rate Gap Expands Between US and Taiwan 
--------------------------------------------- -------- 
 
4.  Another major cause for a weak NTD was FX market 
observers' strong expectations that the U.S. Federal Reserve 
Board of Governors (FED) would raise interest rates at its 
June 30 board meeting and that Taiwan would follow suit. 
These expectations came true as the FED increased its 
benchmark rate by 25 basis points on June 30 and Taiwan's 
Central Bank of China (CBC) raised its benchmark rate by 
12.5 basis points.  As of July 1, benchmark interest rates 
in Taiwan are 1.25 percentage points lower than in the 
United States. 
 
Seasonal Factor: Settlement of Import Accounts 
--------------------------------------------- - 
 
5.  There are also seasonal factors at work.  FX traders 
attribute part of the NTD depreciation to business firms' 
obligation to settle their import accounts prior to the end 
of Q2.  US dollars bought by importers via foreign banks in 
Taiwan on June 29 were estimated at US$600 million or one- 
third of total FX trading volume that day. 
 
Foreign Capital Remains in Taiwan 
--------------------------------- 
 
6.  Despite the depreciation, there is no apparent sign of 
capital outflow.  Foreign portfolio investors posted net 
stock purchases on June 29, and cumulative net stock 
purchases in June posted a new monthly high of NT$131.3 
billion (US$4.15 billion at an exchange rate of NT$31.6 per 
USD) as of June 29.  However, their daily net purchases 
shrank to NT$2.5 billion (US$80 million) on June 28 and 
NT$1.16 billion (US$36 million) on June 29 down from NT$9.2 
billion or US$292 million on June 27. 
 
PAAL