Taiwan dollar drops with US ready to apply currency manipulation tag

The Taiwan dollar has fallen sharply amid rising expectations that the United States will label the Asian country as a currency manipulator, despite the two ties strengthening in the face of an increasingly aggressive China.

US President Joe Biden’s administration set to include Taiwan in semi-annual name and shame list this month because it meets the three criteria used by the Treasury Department to assess whether a country is degrading its currency. Yang Chin-long, governor of Taiwan’s central bank, admitted that it was “possible” that Washington could label the nation as manipulative.

But analysts have warned that any tariff imposed on Taiwan’s exports as a result of the designation could hurt an important relationship in the region. Biden sought to strengthen diplomatic relations after recent incursions by the Chinese military in Taiwan’s airspace, and the global chip shortage has increased the reliance of US industry on technology groups such as Taiwan Semiconductor Manufacturing Company.

“Yes [the US] want to reduce our trade surplus with them, so we could just stop selling our chips to them, ”Yang joked to lawmakers recently at a hearing in Taipei. “But they need it.”

The Taiwanese currency has fallen more than 2 percent from its recent high in early March at 28.5 per US dollar, after holding around 28 per dollar for most of the first quarter.

Aside from fears that the United States may brand the country as a currency manipulator, the decline in the Taiwan dollar has also been compounded by developments in global markets.

Rising U.S. Treasury Yields made holding Taiwanese debt relatively less attractive to global investors, while the move away from growth stocks such as tech led to a sell off of shares of Taipei-listed semiconductor manufacturers. These factors have hit the demand for assets denominated in Taiwan dollar.

Expectations that the Biden administration will target Taiwan have increased following the appointment of economist Brad Setser to the office of the U.S. Trade Representative in February. Setser’s critical report of currency hedging tactics used by Taiwan’s central bank was cited by the Treasury when it put the country on its watch list last year.

Analysts pointed to trade trends for the Taiwan dollar in January and February which they said indicated attempts by the central bank to limit the currency’s appreciation, thereby supporting the important export industry.

During the period, the Taiwanese currency frequently strengthened against the dollar early in the day before weakening again in the last hour of trading. Iris Pang, chief greater China economist at ING, said this suggested central bank involvement. “It’s very clear. . . there was some kind of very strange operation going on in the Taiwanese dollar foreign exchange market, ”she added.

A book by current and former central bank officials alleged that the resistance of policymakers to a stronger currency had hurt Taiwan by encouraging many exporters to focus on making cheap products rather than innovative products.

Taiwan’s central bank declined to comment on the country’s foreign exchange policy.

Even though the United States calls Taiwan a currency manipulator, some analysts believed Washington would likely not follow tariffs given the sensitive nature of regional geopolitics.

“It’s not just economics when it comes to Taiwan, it’s always politics,” said Pang of ING.

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