By Roger Tung
TAIPEI (Reuters) - Taiwan's central bank is asking some custodian banks to stem the flow of fresh capital into its financial markets, two people with direct knowledge of the matter told Reuters on Wednesday, as the local dollar hovers at more than two-year highs.
The sources said custodian banks - which handle cash and securities for foreign participants investing in a market - were told to advise their clients not to remit new funds.
The central bank later took issue with the sources' comments. In a statement, it said the reported comments "do not match the facts" but did not elaborate.
"I'm dumbfounded. The clients have already bought stocks and you don't let them remit in. How do you settle the trade?" said one of the people with direct knowledge of the matter.
The move could ease upward pressure on the Taiwan dollar <TWD=TP>, which has gained nearly 6 percent against the U.S. dollar so far this year.
Taiwan's central bank, wary of being labeled a currency manipulator by U.S. President Donald Trump, has pulled back on its interventions to weaken the currency.
The central bank governor has also attributed the strong currency to massive fund inflows, with investors attracted by Taiwan companies' stock dividends.
When asked about the issue earlier, a central bank official would only say Taiwan has liberalized its capital account so capital flows can freely move, including foreign funds investing in local shares.
Later in the day, the central bank issued a statement that said:
"Today a media report cited a custodian bank saying 'the central bank is hoping foreign custodian banks request their clients to not remit new capital', this does not match the facts."
TAIWAN SEEING STRONG INFLOWS
Strong foreign fund flows have made the Taiwan dollar Asia's second-best performing currency this year and boosted its stock market by 7 percent to nearly 10,000 points, a level it has not closed above in 17 years.
The Taiwan dollar reached T$30.40 against the U.S. dollar on Tuesday, a level not seen since November 2014 and the benchmark stock index <.TWII> hit an intraday high of 9,976.61, but fell back to close down 0.5 percent on Wednesday.
"Foreign investors get annoyed at policy intervention," said Leon Chu, an investment manager with Franklin Templeton Securities Investment in Taipei. In the long term, such a move will hurt the domestic stock market, but in the short term, it could increase daily turnover.
"Perhaps the central bank is hinting T$30.50 is its bottom line," he said.
A Taiwan central bank official told Reuters earlier the government was keen to avoid the ire of the United States over its currency policy. Trump has criticized China, Japan and Europe for policies he claims artificially weaken their currencies and make their exports more competitive.
His administration has said it will analyze the currency practices of major trading partners, and the U.S. Treasury is required to publish a report on these practices in mid-April. Being labeled a "currency manipulator" could result in punitive tariffs on that country's goods.
The Taiwan dollar's strength has come as the economy appears to be recovering and the government is about to unleash long-term fiscal spending to ensure growth stays on track.
But the effects have been particularly toxic for Taiwan's insurers, which have been hit with millions of dollars in losses on the foreign exchange risk reserves they hold to contain currency volatility. Further gains in the local dollar would hurt the island's exporters, who drive much of the economy.
Central bank governor Perng Fai-nan will hold a news briefing Thursday after the bank's quarterly policy meeting, where the policy rate is expected to remain unchanged.
In March so far, net foreign inflows have reached around $942 million, adding to the $5.96 billion for January-February, and surpassing the $5.56 billion recorded for all of 2016, according to data from the Financial Supervisory Commission.
(Additional reporting by Liang-sa Loh and Emily Chan; Writing by J.R. Wu; Editing by Jacqueline Wong and Kim Coghill)