Taiwan dollar off decade high ahead of c.bank meet

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TAIPEI, March 27 (Reuters) - The Taiwan dollar TWD=TP eased off a 10-1/2-year high on Thursday, due to foreign fund outflows as the stock market fell and to short-covering of U.S. dollars, with investors awaiting an interest rate decision by Taiwan's central bank later in the day.

The Taiwan dollar ended weaker at T$30.180 to the U.S. dollar, compared with the previous close of T$30.010, the highest finish since October 1997. Before Thursday, the Taiwan dollar posted gains for 7 consecutive sessions on better economic prospects.

Volume on the main Taipei Forex Inc exchange was $2.001 billion, compared with $1.858 billion a day earlier.

"Taiwan's stock market fell today so the central bank used weak sentiment to push the U.S. dollar higher," said one dealer at a local bank.

Taiwan's central bank has also been buying U.S. dollars to stem the Taiwan dollar's recent sharp rise.

The central bank wants the Taiwan dollar to be on a gradual firming trend because it needs to curb inflationary pressures and yet maintain Taiwan's export competitiveness.

Since the beginning of the year, the Taiwan dollar has risen 7 percent.

On Thursday, foreign fund sold a net T$25.6 billion ($850 million) in Taiwan stocks .TWII, which fell 1.85 percent following losses on Wall Street.

Taiwan's central bank is holding its rate-setting meeting later in the day, with the market expecting a rate increase of 12.5 basis points, which would be the 15th straight quarterly rise.

Analysts said another rate rise would support the Taiwan dollar as Taiwan now enjoys a rate advantage over the United States, which slashed interest rates this year, making U.S. dollar-denominated assets less attractive.

Some dealers said deals from exporters would also offer some support in coming days since they often need to get rid of their U.S. dollars at the end of the month.

On the smaller Cosmos exchange COSMOS1, the Taiwan dollar stood at T$30.150 to the U.S. dollar, compared with the previous close of T$30.000. (Reporting by Rachel Lee and Baker Li; editing by Ken Wills)