TAIPEI: Taiwan's central bank has urged importers to hedge their foreign-exchange positions, signaling that it was ready to let the Taiwan dollar weaken further after it hovered near six-year lows last week.

The market expects the local currency to weaken to near NT$40 per US dollar later this year, from NT$34.65 now, though the decline likely won't be rapid, as the central bank has to balance maintaining its export competitiveness with ensuring healthy private investments.

Taiwan's economy shrank at a record annual pace of more than 8 percent in the fourth quarter, reflecting the exposure of Asian exporters to a brutal slump in world demand and tipping the island into a recession.

The increasingly bleak outlook for exports could tempt policymakers in Asia to let their currencies weaken in a bid to support company earnings and save jobs.

"If they (importers) can hedge, they should just do so," Central Bank Vice Governor George Chou told Reuters after a meeting between top government officials and industry leaders, but declined to elaborate further.

Chou's comment was in response to a question of why importers have been relatively quiet in trading in the Taiwan dollar market.

Some importers had been wary of buying US dollars when Taiwan's currency was weakening.

Sharp rise

Chou also reiterated previous central-bank comments that the Taiwan dollar's level should be determined by market demand and supply.

The Taiwan dollar ended sharply higher yesterday, off a near six-year intraday low as financial institutions adjusted their positions after recent falls in the local currency and on exporters' deals.

The currency rose to a high of NT$34.60 against the US dollar minutes before closing at NT$34.628, its strongest finish since Feb 17.

Dealers said there was some light US dollar-buying intervention by the central bank just before the market closed.

The currency ended Friday at NT$34.80, its weakest close in nearly six years and its 12th-straight session declining.

"Some foreign investors and banks took profits after the Taiwan dollar's recent decline," a dealer in Taipei said.

But dealers said the local currency would still be on a downward trend, likely weakening to NT$35 in coming weeks.

The day's gain was further boosted by exporters' purchases of the Taiwan dollar.

Exporters prefer a weaker Taiwan dollar, as they can exchange their US dollar earnings to more of the local currency.

Importers, however, were not particularly active during the session, even after the central bank urged importers to hedge their foreign-exchange positions.

Reuters

(HK Edition 02/24/2009 page16)