NTD appreciates and breaks the 30 mark! What are the three main drivers behind the surge in the USD to TWD exchange rate, and how to judge the future trend?

From Panic over Depreciation to a 5% Surge in a Single Day: TWD Appreciates to a 40-Year Record

In just one month, Taiwan’s foreign exchange market shifted dramatically from panic over the potential depreciation of the New Taiwan Dollar to a surge of appreciation. In early May, within two trading days, the TWD appreciated nearly 10%, with a single-day increase setting a 40-year high.

On May 2nd, the USD/TWD exchange rate jumped 5% in one day, closing at 31.064, a 15-month high. Then on May 5th, it surged another 4.92%, with intraday trading breaking the psychological 30-level, touching a low of 29.59, startling the entire forex market. This intense volatility even led to the third-highest trading volume in history.

Compared to other Asian currencies, although the RMB, HKD, JPY, and SGD all appreciated, the speed and magnitude of the TWD’s appreciation are unmatched in the region. The SGD rose 1.41%, the JPY 1.5%, and the KRW 3.8%, making the TWD’s surge particularly notable.

Revealing the Three Key Drivers Behind the TWD Appreciation

First Layer: Policy Expectations Shift

After the U.S. government announced a reciprocal tariff policy, two strong market expectations emerged. First, global manufacturers might concentrate procurement orders from Taiwan to avoid tariffs, boosting export prospects; second, the IMF unexpectedly raised Taiwan’s economic growth forecast, coupled with strong Taiwan stock market performance, providing solid support for the TWD.

Buoyed by these positive news, foreign capital continued to flow in, becoming the first driving force behind the TWD’s appreciation.

( Second Layer: Central Bank Dilemma

Taiwan’s central bank faces a delicate dilemma during this period. Although it declared no intervention in the forex market, market observers point out that under the context of U.S.-Taiwan trade negotiations, the central bank’s intervention space is constrained.

The reason is that the U.S. government’s “Fair and Reciprocal Trade Plan” explicitly includes “currency intervention” as a review item. Taiwan’s trade surplus in the first quarter of last year reached $23.57 billion, up 23% year-over-year, with the surplus against the U.S. soaring 134% to $22.09 billion. This has raised concerns that without central bank support, the TWD could face enormous upward pressure.

) Third Layer: Financial Institutions’ Hedging Operations

A UBS research report reveals the third driver. Besides macro expectations, large-scale forex hedging operations by Taiwanese insurers and corporations, along with concentrated closing of TWD financing arbitrage trades, have collectively amplified this exchange rate volatility.

Notably, Taiwan’s life insurance industry holds up to $1.7 trillion in overseas assets (mainly U.S. Treasuries), which historically lacked sufficient hedging measures. This is because “the central bank has historically been able to effectively suppress significant TWD appreciation,” but the situation has changed. UBS warns that restoring forex hedging to trend levels could trigger about $100 billion in dollar selling pressure, equivalent to 14% of Taiwan’s GDP, a risk not to be underestimated.

USD to TWD Appreciation Space: How High Will It Go?

Limited Upside for Appreciation, 28 Yuan Unlikely

Despite the recent rapid appreciation of the TWD, most industry insiders believe that it is highly unlikely to reach 28 yuan per USD. While market expectations suggest that the Trump administration may continue to pressure for appreciation, the specific magnitude remains uncertain.

Judging Reasonableness with the BIS Index

An important tool to assess whether the exchange rate is reasonable is the real effective exchange rate index (REER) compiled by the Bank for International Settlements (BIS), with 100 as the equilibrium baseline.

As of the end of March:

• The USD index was about 113 → indicating a significant “overvaluation”
• The TWD index was about 96 → showing a “reasonably undervalued” state

In comparison, major Asian export currencies are more notably undervalued, with JPY and KRW indices at 73 and 89 respectively.

Broader Timeframe: Trends of TWD Appreciation and Depreciation

Extending the observation period from the recent abnormal volatility to the beginning of the year reveals that the TWD’s appreciation over the past months is roughly in line with the JPY and KRW:

• TWD appreciation: 8.74%
• JPY appreciation: 8.47%
• KRW appreciation: 7.17%

From a longer-term perspective, the TWD’s appreciation trend remains synchronized with regional currencies, and the recent rapid surge is just part of a larger fluctuation cycle.

UBS Forecast: Continued Appreciation

UBS’s latest report predicts that the TWD’s appreciation will continue from multiple dimensions:

Valuation models show the TWD has shifted from moderate undervaluation to a fair value exceeding 2.7 standard deviations; forex derivatives markets show the “strongest appreciation expectations in five years”; historical experience suggests that similar large single-day surges are unlikely to reverse immediately.

UBS advises investors not to prematurely reverse positions, but expects that when the trade-weighted index of the TWD rises another 3% (approaching the central bank’s tolerance limit), official intervention may intensify to smooth out volatility.

A Decade in Review: Understanding Long-Term Cycles of TWD Appreciation and Depreciation

Over the ten-year period from October 2014 to October 2024, the USD/TWD exchange rate fluctuated between 27 and 34, with an amplitude of about 23%. In contrast, the JPY/USD volatility reached 50% (from 99 to 161), twice that of the TWD, making the TWD relatively stable among global currencies.

The appreciation and depreciation of the TWD mainly depend on Federal Reserve policies, not Taiwan’s central bank. Between 2015 and 2018, influenced by Chinese stock market volatility and the European debt crisis, the U.S. slowed balance sheet reduction (QT) and restarted quantitative easing, strengthening the TWD. Later, as the U.S. raised interest rates, until the COVID-19 pandemic in 2020, the Fed expanded its balance sheet from $4.5 trillion to $9 trillion, lowering interest rates to near zero, causing the USD to depreciate and the TWD to appreciate to a low of 27 per USD.

After U.S. inflation spiraled out of control in 2022, the Fed launched aggressive rate hikes, causing the USD to surge and the TWD to fall back to around 32. It was only after the Fed ended its high-interest cycle and began cutting rates in September 2024 that the exchange rate adjusted again.

How to Capture Investment Opportunities from TWD Appreciation?

( For Forex Traders

You can directly trade USD/TWD or related currency pairs on forex platforms to capture short-term fluctuations within days or even within the same day. If you hold USD assets, you can hedge through derivatives like forward contracts to lock in gains from TWD appreciation.

) For Beginners

When seizing recent volatility opportunities, follow three principles: start with small capital to test the waters, avoid impulsive increases, and maintain a stable mindset. Choose platforms supporting small-scale short-term trading, and repeatedly practice trading strategies in demo accounts to assess feasibility.

( Long-term Investment Strategy

With Taiwan’s solid economic fundamentals and booming semiconductor exports, the TWD may oscillate in the 30 to 30.5 range over the long term, remaining relatively strong. It is recommended to keep forex positions at 5%-10% of total assets, with the rest diversified into global assets to reduce risk.

In operations, use low leverage for USD/TWD trades and set stop-loss points for self-protection. Keep a close eye on the Taiwan central bank’s moves and U.S.-Taiwan trade developments, as these will directly influence the exchange rate. Additionally, consider investing in Taiwan stocks or bonds to make the overall portfolio more balanced and manageable.