The Taiwan dollar, after experiencing a significant rebound in August, is now showing signs of fragility, according to analysts. This comes after the currency gained 1.4% against the US dollar this month, recovering from a 1.3% depreciation since the start of the year. The initial strength was driven by weaker-than-expected US inflation and retail sales data, which led to reduced expectations of a Federal Reserve rate hike in September. On Monday, August 17, the US dollar dropped below NT$32 for the first time in over a month, closing at NT$31.852, making the Taiwan dollar the strongest Asian currency that day. Foreign institutional investors further bolstered the currency by purchasing a net NT$45.45 billion ($1.4 billion) worth of shares.
However, this upward momentum is now at risk. A major factor is the impending record dividend payouts by Taiwanese companies, totaling over NT$2.5 trillion ($78.5 billion) this year. These payouts are expected to lead to significant foreign exchange conversions as overseas investors repatriate funds, putting downward pressure on the local currency. This phenomenon has been noted by analysts as a recurring pattern that can introduce volatility. Additionally, a potential rebound in the US dollar, particularly if upcoming Federal Reserve meeting minutes suggest a hawkish stance, could further weaken the Taiwan dollar.
Moreover, the robust foreign institutional inflows that have supported the Taiwan dollar in recent weeks are likely to slow. While foreign investors continued to be net buyers, purchasing shares and aiding the currency's strength, this trend is not expected to persist at the same pace. The Taiwan dollar's surge in mid-August was also attributed to increased sensitivity among investors to possible changes in US currency policy, with some speculating that the US Treasury might adopt a more active approach to misaligned exchange rates.
The currency's previous surge to a one-month high on August 14, where it gained 0.5% and touched NT$31.991 per US dollar, was also primarily driven by foreign investors pouring funds into local equities. This reflected strong capital inflows and a perceived lack of significant intervention by Taiwan's central bank. However, the overall outlook suggests that the factors that propelled the Taiwan dollar's August rally are set to diminish, potentially leading to renewed pressure on the currency and challenging its export-driven economy's competitiveness.
