(ATF) Taiwan's foreign exchange reserves rose by over US$16.5 billion in December, the fastest monthly rise on record, as the central bank announced it needed to intervene in the forex market to cope with a flood of foreign capital.
Total forex reserves stood at US$529.91 billion as of the end of December 2020, representing a full-year increase of $51.78 billion in 2020.
"Large capital inflows caused excessive volatility," the Central Bank of the Republic of China (Taiwan) said in a statement on its website. "The central bank stepped in to maintain an orderly foreign exchange market."
The bank also cited returns from foreign exchange reserves management and the appreciation of the euro and other reserve currencies against the US dollar as factors. "Foreign exchange reserves denominated in these currencies were worth more in terms of the base currency, the US dollar," CBC said.
The market value of securities investment and the Taiwan dollar deposits held by foreign portfolio investors at the end of December 2020 reached US$603.1 billion, equivalent to 114% of foreign exchange reserves, the bank added.
The Taiwan dollar is at a more than 23-year high against the US dollar. Reuters reported that the appreciation had unnerved the government, which is wary of being labelled a currency manipulator by Washington, Taiwan's most important international backer.
Currency on watchlist
Last month, the US Treasury added Taiwan to a "monitoring list" of countries whose currency practices have caused concern, the first time it has appeared on the list since 2017.
CBC responded by saying Taiwan sees Washington's trade policies towards China as the reason its surplus with the US has grown, adding that it hoped to lower the surplus to address concern about the Taiwan dollar's exchange rate.
Central bank deputy governor Yen Tzung-ta told Taiwan's legislature that maintaining the stability of the foreign exchange rate was an "obligation and priority", and that the US decision was based on information for last year rather than the current exchange rate.
The US Treasury's decision is a reflection of the international economic situation and the island's trade surplus with the United States, he added. "We hope to cut the trade surplus with the United States," Yen said. "This is the long-term solution."
On January 5, the Taiwan dollar reached NT$27.973 per greenback, the highest since July 1997, within minutes after trading opened. It opened at NT$28.250 and rebounded to the closing level of NT$28.402.
"We expect a continuation of gains of those currencies with large weights in emerging market benchmark indices – so China's yuan, Korea's won and the Taiwan dollar," Chris Turner, global head of markets at ING, said.
With reporting by Reuters