Taiwan dollar could remain weak; sound economy expected to cap fall

Taipei, Aug. 20 (CNA) As the Taiwan dollar fell to a new low against the U.S. dollar in more than two years on Friday, the local currency is expected to see further weakness in the short term but Taiwan's healthy economy will likely lend support and limit the fall, according to economists.

On Friday, the Taiwan dollar closed down NT$0.029 on the Taipei forex market, falling below the psychological level of NT$30 to NT$30.020 against the greenback, the lowest level since June 2020, as the central bank scaled back its intervention to allow the currency to weaken.

Wu Meng-tao (吳孟道), an economist with the Taiwan Institute of Economic Research (TIER), said he was not surprised that the Taiwan dollar fell below the NT$30 mark as foreign institutional investors moved large funds out of the region for greenback-denominated assets at a time when the U.S. Federal Reserve has launched a rate hike cycle.

Wu said a downtrend for the Taiwan dollar will continue as the interest rate gap between the United States and Taiwan is widening.

Since March, the Fed has raised its key interest rates by 225 basis points to take on skyrocketing inflation, while Taiwan's central bank has increased rates by only 37.5 basis points. The Fed is expected to remain aggressive in monetary tightening down the road.

However, Wu said as Taiwan has performed well economically compared with the United States, its sound economic conditions are expected to provide support to the Taiwan dollar. He forecast the local currency will hover around NT$30 for a while.

Taiwan's Directorate General of Budget, Accounting and Statistics (DGBAS) earlier this month slightly lowered its forecast for Taiwan's 2022 gross domestic product (GDP) growth by 0.15 percentage points to 3.76 percent in the wake of weaker exports and a fall in private consumption. For 2023, Taiwan's GDP growth is expected to reach 3.05 percent, the DGBAS said.

According to IHS Markit, the American economy is expected to grow 1.4 percent in 2022 and 1.3 percent in 2023.

However, Lin Chien-fu (林建甫), the chief economist at the CTBC Financial Holding Co., said with the Fed's intensified efforts in tightening, foreign institutional investors are expected to continue to cut their holdings in stocks in Taiwan and speed up their pace to exit the local market, which will post more downward risks to the Taiwan dollar.

In addition, Lin said, as the Chinese yuan is likely to stay weak against the U.S. dollar, its weakness could drag down the Taiwan dollar.

He added that with gradually eased COVID-19 border controls, more and more Taiwanese are expected to travel overseas, which will send the surplus of service income lower and even result in a deficit, leading to a negative effect on the local currency.

On the other hand, a falling Taiwan dollar is expected to benefit Taiwanese exporters as they will enjoy a competitive edge, and the semiconductor industry will be one of the beneficiaries, analysts said.

Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chipmaker, has forecast the Taiwan dollar would average at NT$29.70 in the third quarter, and based on the currency value estimate, its consolidated sales are expected to range between US$19.8 billion and US$20.6 billion that quarter.

TSMC's gross margin -- the difference between revenue and the cost of goods sold -- for the third quarter is forecast to range between 57.5 percent and 59.5 percent in the July-September period.

Now, as the Taiwan dollar continued to trend lower and fall below the NT$30 level, TSMC is expected to see its earnings improve in the third quarter as it did in the second quarter, analysts said.

In the second quarter, TSMC's consolidated sales stood at US$18.16 billion, beating its forecast of US$17.6 billion-US$18.2 billion, while its gross margin hit 59.1 percent, also going beyond its forecast of 56-58 percent.

For its part, United Microelectronics Corp. (UMC), a smaller contract chipmaker, has said whenever the Taiwan dollar depreciates by 1 percent against the U.S. dollar, its gross margin rises by 0.3 percentage points.

A weaker Taiwan dollar cuts both ways for TSMC and UMC, however. As the two semiconductor giants have been gearing up to expand their production capacity, the weakness of the Taiwan dollar is expected to make their imports of production equipment more expensive, analysts said.

But analysts said the two companies are sitting on a large amount of cash so they will be able to easily assuage the impact of rising costs.

As for the old economy sector, Larry Wei (魏燦文), chairman of the Taiwan Association of Machinery Industry, said he was glad to see a weaker Taiwan dollar as members of his association largely depend on exports. He said the currency weakness will raise their competitiveness in the global market.

Wei said he hoped the Taiwan dollar will fall further to around NT$32 against the U.S. dollar, to help Taiwanese machinery exporters secure more orders from foreign buyers.