Forex reserves hit high on central bank market intervention

Taipei, Dec. 4 (CNA) Taiwan's foreign exchange (forex) reserves hit another record high at the end of November as the central bank stepped into the local currency market to slow the Taiwan dollar's appreciation against the U.S. dollar.

In an admission of its market intervention by buying the greenback to cap the gains posted by the Taiwan dollar at a time of continued fund inflows, the central bank said the country's forex reserves as of the end of November stood at US$513.397 billion, up US$12.16 billion from a month earlier.

The growth was the largest-ever month-on-month increase in forex reserves in the country's history, according to the central bank. In November, the U.S. dollar fell 0.35 percent against the Taiwan dollar. Analysts said that without the central bank's support, the greenback could have lost more.

In December, the U.S. dollar continued a downtrend as foreign investors kept moving funds into the region at a time when the major central banks in the world pumped more funds into the market amid the COVID-19 pandemic, analysts said.

On Friday, the greenback closed at NT$28.521, down NT$0.147 against the Taiwan dollar, after rebounding from the day's low of NT$28.250. The closing level of the U.S. dollar was a new low in 23 years.

Speaking to reporters, Henry Yen (顏輝煌), head of the bank's Foreign Exchange Department, said the U.S. Federal Reserve continued with quantitative easing, causing liquidity spillovers and fund flows into other countries, which led to volatility in the currency markets.

"Under such circumstances, the central bank has had to jump into the market to maintain market order and stabilize the value of the Taiwan dollar," Yen said.

According to the central bank, Taiwan's central bank was not the only one to buy into the U.S. dollar to counter market volatility.

Central banks in other economies such as South Korea, India, Singapore and Hong Kong also stepped into the market to slow the greenback's fall, and their forex reserves rose accordingly.

However, Yen reiterated that the central bank will continue to respect market mechanisms if no large fund flows are seen, which means there is no need for the bank to intervene. "The central bank always sticks to this policy," he said.

In addition to its market intervention, the central bank said the growth in forex reserves also resulted from an increase in returns from the management in the bank's portfolio.

Moreover, since non-U.S. currencies, such as the Australian dollar, appreciated against the greenback, as the assets denominated in these currencies in the central bank's portfolio were converted into U.S. dollars, Taiwan's forex reserves rose, the central bank said.

Meanwhile, the value of foreign investor holdings in Taiwanese stocks and bonds, and Taiwan dollar-denominated deposits as of the end of November stood at US$550.7 billion as of the end of that month, up US$54.2 billion from a month earlier.

Those holdings were equivalent to 107 percent of Taiwan's total forex reserves as of the end of November, marking the first time the ratio had breached the 100 percent mark and representing a new high, central bank data showed.

Yen said the increase resulted from a strong showing by the local equity market, in which the benchmark weighted index on the Taiwan Stock Exchange rose 9.38 percent as foreign institutional investors raised their holdings in large cap tech stocks.

The central bank has said it will ensure ample forex reserves to maintain stable financial markets at home and protect against the contingency of foreign institutional investors suddenly moving their funds out of the country.