## NT Dollar Depreciation Crisis: How US Rate Hikes Are Reshaping Taiwan's Investment Landscape

Taiwanese investors have recently faced an awkward situation—seemingly profitable stocks ultimately result in losses due to the weakening of the NT dollar. The underlying culprit behind this phenomenon is the impact of US interest rate hikes on the NT dollar.

### How the Chain Reaction of US Rate Hikes Affects Taiwan

Since March 2022, the Federal Reserve has embarked on an aggressive rate hike cycle. By the end of 2023, it had accumulated a total increase of 20 basis points (a total of 500 basis points), pushing the benchmark interest rate from 0-0.25% to 5.00%-5.25%. The speed and magnitude of this rate hike cycle are unprecedented in history—just in June, July, September, and November 2022, the Fed raised rates by 75 basis points for four consecutive months. The fundamental reason driving all this is to control runaway inflation: in June 2022, US CPI reached its highest level in 40 years.

The most direct consequence of rate hikes is the appreciation of the US dollar. When US bank deposit rates increase, global investors rush to buy dollars seeking returns, leading to strong demand for USD and a corresponding strengthening of the exchange rate. Throughout 2022, the US dollar index rose by 8.5%.

**The NT dollar weakens accordingly.** As the US dollar appreciates, fewer USD can be exchanged for NT dollars. This poses a direct threat to Taiwan’s import-dependent economy—US imports account for 22.8% of Taiwan’s agricultural imports, and these imported goods are all priced in USD. The depreciation of the NT dollar directly raises the cost of imported goods, with Taiwan’s food CPI rising by 6% in 2022, and egg prices soaring by 26%.

Although Taiwan’s central bank also raised interest rates five times, totaling a 75 basis point increase, these measures are far less forceful than the Fed’s, and cannot prevent the continued depreciation of the NT dollar.

### The Malicious Cycle of Capital Outflows and Stock Market Volatility

The weakening NT dollar triggers a more serious chain reaction: **capital begins to flow out**.

Imagine you are a foreign investor, exchanging $100,000 USD for 2.7 million NT dollars to invest in Taiwan stocks. After a year, you earn 300,000 NT dollars, which should be a happy outcome. But after the NT dollar depreciates by 11%, 3 million NT dollars can only be exchanged back for $97,000 USD—resulting in a loss! Consequently, large amounts of foreign capital start selling stocks to convert to cash and switch to USD for hedging. When most investors sell simultaneously, the stock market naturally declines.

Data confirms this: in 2022, Taiwan’s stock market experienced capital outflows of $41.6 billion USD, ranking first in Asia. The Taiwan Weighted Index fell by 21% that year, ranking sixth from the bottom globally.

### Differentiated Impact of Rate Hikes on Various Assets

**Stock Market**: Rate hikes increase financing costs, lower valuations of listed companies, and directly harm the stock market. In 2022, the S&P 500 declined by 17%, and the Nasdaq plunged by 30%. In 2023, the stock market rebounded mainly because the market expects the rate hike cycle to be nearing its end and anticipates future rate cuts.

**Financial stocks**: Benefited from the cycle. Banks’ interest margin expansion led to a significant increase in interest income. Taiwan’s banks earned NT$33.3 billion in interest income in 2022, up 38% year-over-year, and their stock prices rose by 20%. This is one of the few sectors to benefit during the rate hike cycle.

**Bonds and Gold**: Rising interest rates cause bond prices to fall (interest rates and bond prices move inversely), while gold tends to move opposite to rate hike expectations. When the market anticipates a slowdown in rate hikes, gold prices rise; when expectations of further rate increases grow, gold prices fall.

### Outlook for Federal Reserve Policy in 2024

Current market expectations suggest that the Fed’s rate hike cycle is nearing its end. In 2024, policy will shift toward rate cuts, with the annual interest rate expected to gradually decrease from the current 5.25%-5.50% to around 4.00%. The specific schedule is as follows:

**2024 Federal Reserve Rate Decision Outlook (Taiwan Time)**

| Rate Decision | Meeting Minutes | Estimated Rate (%) |
|----------------|------------------|-------------------|
| February 1 | February 22 | 5.25-5.50 |
| March 21 | April 11 | 5.25 |
| May 2 | May 23 | 5.00 |
| June 13 | July 4 | 4.75 |
| August 1 | August 22 | 4.50 |
| September 10 | October 10 | 4.25 |
| November 8 | November 29 | 4.00 |

### Investor Strategies

**Strategy 1: Allocate USD Assets**

During the rate hike cycle, USD appreciation offers a certain return. Investors can participate in USD appreciation through bank currency exchanges, futures, CFDs, and other instruments. For small capital, leverage trading tools can amplify gains with smaller principal.

**Strategy 2: Rebalance Stock Portfolio**

Reduce holdings of high-valuation stocks (especially tech stocks), and increase allocations to high-dividend-yield stocks, particularly financial stocks. This approach can hedge against the negative impact of rate hikes while enjoying dividend income from financials.

**Strategy 3: Hedge with Derivatives**

The Taiwan Weighted Index and Nasdaq 100 are highly correlated. By shorting international tech indices, investors can partially offset losses from a decline in Taiwan stocks. This requires some experience with derivatives trading.

**Strategy 4: Watch for the Turning Point of Rate Cuts**

The end of rate hikes often signals an upcoming turning point. When the Fed begins to signal rate cuts, the stock market usually reacts in advance. At this stage, moderately increasing stock holdings can capture rebound opportunities during the rate cut cycle.

### Summary

The impact of US rate hikes on Taiwan’s economy is multi-faceted—NT dollar depreciation pushes up prices, capital outflows depress the stock market, and the structure of import/export costs becomes distorted. But these changes also create opportunities. Savvy investors can allocate USD assets, adjust stock structures, and use hedging tools to preserve and grow assets during the rate hike cycle. The key is to grasp the rhythm of policy cycles—defend during the peak of rate hikes and cautiously advance at turning points.