Taiwan Dollar May Extend Loss as Funds Sell Stocks, HSBC Says

By Bob Chen

Aug. 26 (Bloomberg) -- Taiwan's dollar, Asia's second-worst performer this quarter, is likely to weaken further as a global economic slump prompts overseas investors to cut holdings of the island's shares, according to HSBC Holdings Plc.

The currency dropped to a six-month low after a report yesterday showed growth in Taiwan's export orders slowed to 5.5 percent from a year earlier in July, the least since May 2003. The European and Japanese economies shrank in the second quarter, which may reduce demand for Asian goods.

``Economic growth is almost entirely dependent on the export sector,'' Richard Yetsenga, head of Asian currency strategy at HSBC, Europe's biggest bank, said in an interview today. He expects a reversal of the inflows into Taiwan because they were ``based on strong emerging economies.''

The currency fell as much as 0.4 percent to NT$31.558 against the dollar, the weakest since Feb. 21, according to Taipei Forex Inc. It was at NT$31.54 as of 1:15 p.m. local time. HSBC forecasts the Taiwan dollar will weaken 1.4 percent to NT$32 by the first quarter of 2009.

HSBC's currency prediction compares with a NT$30.3 median estimate among 19 finance firms surveyed by Bloomberg News for the quarter.

Overseas investors have put $69 billion into Taiwan stocks since 2003, the largest net inflow for an Asian country besides Japan, according to data from HSBC. The data include investments from India, South Korea, Indonesia, the Philippines, Thailand and Vietnam.

Slumping Stocks

Eight of the 10 most-active Asian currencies outside Japan declined against the U.S. dollar this quarter. The island's Taiex Index of stocks has lost more than 18 percent this year after rising 8.7 percent in 2007, a fifth annual gain.

Yetsenga wrote in a research note today that he didn't expect the central bank to be too concerned about the decline in the Taiwan dollar because of the competitiveness of exporters.

``The uniformity of dollar strength across the region also suggests only limited scope for individual central banks to cap their currencies,'' he wrote.

Non-deliverable forwards contracts in the Taiwan dollar show the currency will trade at an implied rate of NT$31.26 in six months compared with a rate of NT$29.98 on July 25.

Forwards are agreements in which assets are bought and sold at current prices for future delivery.

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net.