Comprehensive Analysis of the New Taiwan Dollar Exchange Rate: How Did the USD/TWD Shift from Depreciation Panic to a Strong Rally?

Since spring 2024, the USD/TWD exchange rate has experienced a dramatic turnaround. Just a month ago, the market was worried about the New Taiwan Dollar breaking below 34 or even 35 against the US dollar. Yet within a few weeks, the trend reversed sharply, making the TWD against USD one of the most eye-catching phenomena in Asian currency markets. What is behind this unusual volatility? How will the USD/TWD exchange rate develop in the future? This article will analyze the outlook from three perspectives: historical context, policy factors, and market mechanisms.

A Decade of Exchange Rate Trends: Why Has the TWD Been Fluctuating Around 30?

To understand the current USD/TWD movement, we need to look at the past decade. From October 2014 to October 2024, the TWD has fluctuated between 27 and 34 against the USD, a range of 23%. In comparison, the Japanese Yen, considered a safe-haven currency, has fluctuated by about 50% (from 99 to 161 per USD). The TWD’s volatility has been relatively moderate.

The core logic is simple: The TWD’s appreciation or depreciation mainly depends on US Federal Reserve monetary policy, not Taiwan’s central bank actively adjusting the exchange rate. Over the past ten years, we have seen three rounds of quantitative easing (QE), attempts to shrink the balance sheet (QT), and a full cycle of aggressive rate hikes after 2022.

Specifically:

• 2015–2018: China stock market crash and European debt crisis led the US to slow QE and restart easing, strengthening the TWD.
• 2018–2020: US rate hikes and dollar appreciation put pressure on the TWD.
• 2020–2022: During the pandemic, the Fed’s balance sheet surged from $4.5 trillion to $9 trillion, rates fell to zero, and the dollar depreciated, pushing the TWD to a record high of 27 per USD.
• 2022–2024: US inflation spiraled out of control, the Fed raised rates sharply, and the dollar surged again, bringing the exchange rate back to around 32 with narrow fluctuations.

Most people have a mental “ruler”: 30. When below 30, it’s seen as a good entry point to buy USD; above 32, it’s a signal to consider selling. This psychological level has become a market consensus and explains why 30 has become a key psychological threshold in this wave of market movements.

Spring 2024’s Dramatic Reversal: Why Did the USD/TWD Spike Short-Term?

After setting the background, the real focus is here. In spring 2024, the TWD against USD experienced a rare and intense fluctuation. Within just a few trading days, the TWD appreciated nearly 10%, setting a 40-year record for single-day gains and triggering the third-largest trading volume in forex history.

This abnormal appreciation has completely changed market expectations. From the start of the year until the policy announcement in spring, the TWD was slightly depreciating by about 1%. Who would have thought that a few weeks of policy shifts could reverse the trend so dramatically?

Notably, while other major Asian currencies also appreciated—SGD up 1.41%, JPY up 1.5%, KRW up 3.8%—the TWD’s appreciation was unique among Asian currencies. This asymmetric volatility raised market alertness and prompted top Taiwanese officials to intervene urgently to stabilize sentiment.

Looking at the longer term, if we extend the observation period from this recent abnormal movement back to the start of the year, we find the TWD appreciated by 8.74%, the JPY by 8.47%, and the KRW by 7.17%. All are roughly in the same range. In other words, everyone is rising, but the TWD has recently experienced an accelerated surge.

Three Main Drivers Behind the TWD’s Appreciation: Policies, Central Bank Dilemmas, and Financial Operations

Driver One: Trump’s Tariff Policies Ignited the Fire

Many believe that the immediate trigger for this unusual TWD appreciation was the change in US government tariff policies. When Trump announced a 90-day delay in implementing reciprocal tariffs, two market expectations emerged:

Expectation 1: A global procurement wave would be triggered, benefiting export-oriented economies like Taiwan, providing strong support for the TWD.

Expectation 2: The IMF unexpectedly raised Taiwan’s economic growth forecast, coupled with strong Taiwan stock market performance, leading to a surge of foreign capital inflows, which fueled the TWD’s rise.

Taiwan, as a key global chip manufacturing hub, is highly sensitive to such expectations. With net foreign investment at 165% of GDP, even small policy shifts can trigger large capital flows.

Driver Two: The Central Bank’s Unprecedented Dilemma

A deeper issue is the limited maneuvering space of Taiwan’s central bank. The Trump administration’s “Fair Reciprocity Plan” explicitly scrutinizes “currency interventions,” putting Taiwan’s central bank in a bind:

On one hand, Taiwan’s trade surplus in Q1 reached $23.57 billion, up 23% year-on-year, with a US trade surplus soaring 134% to $22.09 billion, creating upward pressure on the TWD. On the other hand, aggressive intervention risks being labeled a “currency manipulator” by the US Treasury, potentially affecting US-Taiwan relations.

The central bank’s governor clarified in an emergency press conference that no intervention occurred and denied US pressure, but market concerns are justified—compared to past efforts to suppress rapid TWD appreciation, the current policy environment is more constrained.

Driver Three: Financial Sector Panic-Hedging Amplifies Volatility

The third driver is also noteworthy. According to UBS’s latest research, a single-day 5% appreciation far exceeds what traditional economic indicators would suggest, driven by market resonance:

Taiwan’s life insurers hold about $1.7 trillion in overseas assets, mainly US Treasuries, with limited hedging measures. Historically, the central bank’s ability to suppress TWD appreciation kept hedging costs low. When market sentiment shifts and intervention capacity is limited, insurers face large unhedged USD exposure and are forced into “panic hedging.”

This rush to hedge, combined with concentrated unwinding of USD carry trades, has created abnormal short-term volatility. UBS warns that restoring hedging and deposit scales to trend levels could trigger a USD sell-off of about $1 trillion (14% of Taiwan’s GDP), a significant risk not to be ignored.

How Will the USD/TWD Exchange Rate Develop?

Given this volatility, investors are most concerned: Will the TWD continue to appreciate? How much room is left?

Upside Limit: Difficult to Break 28

Market consensus expects Trump’s administration to pressure further TWD appreciation, but the extent remains uncertain. Most analysts believe that a move to 28 per USD is unlikely. Over-strong appreciation would harm Taiwan’s export competitiveness, and both the government and central bank are unlikely to tolerate such a scenario.

Assessing Fair Value: What Does the REER Index Say?

A key tool for judging whether the currency is overvalued is the BIS’s real effective exchange rate (REER) index. With 100 as the baseline, above 100 indicates possible overvaluation, below 100 suggests undervaluation.

Recent data:

• USD index around 113 → “Overvalued”
• TWD REER around 96 → “Fairly undervalued”
• JPY and KRW indices at 73 and 89 → major Asian export currencies are generally undervalued.

This suggests that, valuation-wise, the TWD still has some appreciation potential, but not as exaggerated as the USD.

UBS’s Outlook: Continued Appreciation?

Despite recent rapid gains, UBS believes the upward trend will persist:

• The valuation model shows the TWD has shifted from moderate undervaluation to about 2.7 standard deviations above fair value, indicating room for further appreciation.
• FX derivatives markets show the strongest bullish outlook in five years, with high consensus among market participants.
• Historical experience indicates that large single-day gains often do not immediately reverse but can establish new support levels.

UBS advises caution against premature counter-trend positions but predicts that if the trade-weighted TWD appreciates another 3% (approaching the central bank’s tolerance limit), authorities may intervene more actively to stabilize the rate.

Strategies for Different Investors Amid TWD Appreciation

The appreciation of the TWD offers opportunities for various investor types:

Experienced Forex Traders: Active Trading

If you are experienced and willing to take risks, consider:

• Strategy 1: Short-term trading of USD/TWD or related currency pairs on forex platforms, capturing daily or intra-day volatility with appropriate leverage and precise entry/exit points.
• Strategy 2: If holding USD assets, use forward contracts or derivatives to hedge against further TWD appreciation, locking in gains and avoiding losses if the rate reverses.

Novice Investors: Risk Management

For beginners wanting to participate without risking too much:

• Principle 1: Start with small positions; avoid impulsive over-leverage. Emotional trading can lead to significant losses.
• Principle 2: Use demo accounts to practice and develop trading strategies.
• Principle 3: Set stop-loss orders to protect capital—preserving your principal is paramount.

Long-term Investors: Portfolio Allocation

For long-term perspectives, the TWD may oscillate around 30–30.5, maintaining relative strength. Key points:

• Allocation: Keep forex exposure at 5–10% of total assets; diversify into global stocks, bonds, and real estate to reduce risk.
• Execution: Use gradual dollar-cost averaging rather than lump-sum entries; adjust positions based on central bank actions and trade developments.
• Risk mitigation: Don’t rely solely on FX; include Taiwanese stocks and bonds to diversify risk.

Key Variables: Central Bank Actions and US-Taiwan Trade Negotiations

Regardless of your strategy, two variables require constant monitoring:

• Central bank intervention: Although the bank denies intervention, if appreciation exceeds tolerable limits, policy responses could alter the trend.
• US-Taiwan trade talks: Developments in tariffs, trade agreements, and US expectations toward Taiwan will influence USD/TWD direction.

Conclusion: Embrace Volatility with Rationality

Over the past decade, the TWD has shown relatively moderate fluctuations driven by policy, capital flows, and hedging activities. While this recent appreciation has caused market turbulence, in a broader context, it reflects Taiwan’s economic resilience, shifts in global geopolitics, and structural features of Taiwan’s financial markets.

For investors, the key is to understand the underlying logic of USD/TWD movements rather than chasing short-term swings blindly. Whether engaging in active trading or long-term holdings, maintaining awareness of central bank policies, trade negotiations, and global liquidity is essential for steady gains in this dynamic environment.