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TWD breaches NT$5 benchmark against the yuan

TAIPEI, Taiwan -- Following the People's Bank of China's decision to expand the yuan's trading band against the U.S. dollar from 1 percent to 2 percent, the New Taiwan dollar continued its strengthening trajectory against the waning yuan, breaching the NT$5 benchmark against its counterpart across the strait.

Merrill Lynch stated yesterday that the change is expected to render detrimental impacts on China's financial and construction and development sector while benefiting exporters, adding that the yuan's strength is likely to reside at around 6.1 against the greenback following the change.

In addition, as the yuan's strength against the greenback is approaching what is deemed reasonable by the international markets, no immediate widespread fluctuations are expected, said the company.

The latest decision by the central bank of China does not represent a surprising development, as its intent has been previewed to the market. The change however, represents the People's Bank of China's firm resolve to proclaim the end of the yuan's era of one-sided appreciation while heralding for more volatility ahead, said Merrill Lynch.

In the intermediate to medium term, Merrill Lunch stated that the reasonable strength of the yuan will be determined by the shifts in the money supply and degree of inflation observed in China and the U.S. Furthermore, in contrast to the previous occasion when the yuan's trading band was expanded and the yuan's strength was still deemed lower than expectations, the yuan's current strength is deemed reasonable by the majority of the world's investors.

The most notable impact of the change may be the exodus of international hot money from China, said the company, adding that while the PRC government is more than capable of stabilizing the value of its currency with its large foreign exchange reserves, many Chinese enterprises are expected to be hard pressed.

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