Will the New Taiwan Dollar appreciate further? How will the central bank's policies and Trump's tariffs affect the future trend of the USD/NTD exchange rate

The Taiwan dollar has skyrocketed nearly 10% in just two trading days, breaking the 30 NT dollar mark and recording the largest single-day increase in 40 years—what is really behind this momentum? Is it a signal of policy shifts or an overreaction of market sentiment? For investors holding USD assets, the forecast of USD/TWD movement has become the most critical issue right now.

From Appreciation Expectations to Market Reality: How the TWD Rebounded from the Bottom

On May 2nd, the new Taiwan dollar to USD exchange rate surged 5% in a single day, closing at 31.064, rewriting a 15-month high. Three days later, the TWD broke the important psychological barrier of 30, reaching a high of 29.59. Such performance stands out among Asian currencies—during the same period, the Japanese yen rose 1.5%, the Korean won 3.8%, and the Singapore dollar 1.41%, all far less than the TWD’s surge.

Notably, this reversal of appreciation came quite suddenly. Just a month ago, markets were worried about a sharp plunge in Taiwan stocks and the TWD potentially breaking 34 or even 35 NT dollars. In just 30 days, market sentiment experienced a dramatic turnaround, completely rewriting investor expectations.

The foreign exchange market also heated up—within just two trading days, the trading volume of USD/TWD hit the third-largest record in history. But can this rally continue? Will the TWD keep appreciating? How solid are the underlying drivers?

Three Forces Driving the TWD Appreciation: Policies, Structural Factors, and Market Operations

Chain Reaction of Trump’s Tariff Policies

Market consensus holds that the newly announced 90-day delay in tariffs was the trigger for this TWD appreciation wave. After this news broke, two major expectations formed: global companies would concentrate procurement, benefiting Taiwan’s exports in the short term; simultaneously, the IMF unexpectedly raised Taiwan’s economic growth forecast, boosting Taiwan stocks. These positive signals attracted significant foreign capital inflows, becoming the first wave of upward momentum for the new Taiwan dollar.

However, Trump’s administration’s “Fair and Reciprocal Trade” plan explicitly made “currency intervention” a key review point, placing Taiwan’s central bank in a delicate dilemma. Officials worry about being labeled a currency manipulator but are also unable to effectively control the pace of appreciation. This dilemma further reinforced market expectations that the TWD would continue to rise.

Central Bank Policy Softening and Market Interpretation

Taiwan’s export-driven economy is highly sensitive to exchange rate fluctuations—external net investment accounts for up to 165% of GDP. When the TWD suddenly surges, top government officials step in to quell the market, and the central bank denies any pressure or intervention from the US. But market interpretation is quite the opposite: this “passive retreat” further confirms that the central bank finds it difficult to intervene strongly as it did in the past.

It’s important to note that Taiwan’s trade surplus in the first quarter reached $23.57 billion, up 23% year-on-year, with the surplus with the US soaring 134% to $22.09 billion. Without the protection of central bank intervention, the new Taiwan dollar indeed faces enormous upward pressure.

Structural Hedging Operations by Financial Institutions

UBS’s latest research reveals a concerning phenomenon: the single-day surge on May 2nd exceeded what traditional economic indicators can explain. The report points out that large-scale currency hedging operations by Taiwanese insurers and corporations, along with concentrated unwinding of NTD financing arbitrage trades, jointly caused this abnormal volatility.

Most notably, Taiwanese life insurers hold overseas assets worth up to $1.7 trillion USD (mainly US Treasuries), yet have long lacked sufficient currency hedging measures. Previously, the market generally believed “the central bank can effectively suppress significant TWD appreciation,” but that assumption is no longer valid. The Financial Times analysis states that the main driver of this currency surge was the passive hedging operations of the life insurance industry.

Will USD/TWD Continue to Appreciate? Multi-Dimensional Assessment of the TWD’s Appreciation Potential

Valuation Model Signals

An important indicator of exchange rate fairness is the BIS’s real effective exchange rate index (REER), with 100 as the equilibrium value. As of late March data:

• The USD index is around 113, indicating a significant overvaluation;
• The TWD index remains around 96, in a reasonably undervalued zone.
• In comparison, the JPY and KRW indices are only 73 and 89, respectively, showing more pronounced undervaluation among major Asian export currencies.

This suggests that, from a valuation perspective, the TWD still has some room to appreciate, but this space is limited. UBS’s valuation model shows the TWD has shifted from moderate undervaluation to a fair value that exceeds the mean by 2.7 standard deviations, approaching the upper limit of a reasonable appreciation trend.

Regional Synchronization from a Long-Term Perspective

If we extend the observation period from recent abnormal fluctuations to the start of the year, we find that the cumulative appreciation of the TWD against the USD is roughly in line with other Asian currencies:

• TWD up 8.74%
• JPY up 8.47%
• KRW up 7.17%

Although the TWD has appreciated rapidly recently, over a longer horizon, its trend remains synchronized with regional currencies. This indicates that the TWD’s appreciation is not an isolated phenomenon but part of a collective movement of Asian currencies in a weak USD environment.

Realistic Assessment of the 28 NT dollar Level

Most industry insiders believe that the possibility of the TWD reaching 28 per USD is very low. Even in the most optimistic scenario, the central bank would step in to intervene if the trade-weighted index of the TWD rises another 3% (approaching the central bank’s tolerance limit). This suggests that the 30 to 30.5 NT dollar range may become a key zone in the near future.

A Decade of Exchange Rate Memory: Understanding the Historical Logic of TWD Appreciation

Over the past decade (October 2014 to October 2024), the TWD/USD exchange rate fluctuated between 27 and 34, a 23% range, representing relatively low volatility compared to global currencies. In contrast, the JPY experienced a 50% fluctuation (from 99 to 161), twice as volatile.

The TWD’s small interest rate swings mean that its gains and losses are mainly driven by Fed policies. From 2015 to 2018, as the US slowed its quantitative tightening and continued easing, the TWD began to strengthen. After 2018, despite US rate hikes, the COVID-19 pandemic in 2020 led the Fed to expand its balance sheet rapidly—doubling from $4.5 trillion to $9 trillion USD—and lowering interest rates to zero. As a result, the USD depreciated, and the TWD surged to 27 per USD.

Post-2022, US inflation spiraled out of control, prompting the Fed to raise rates sharply, causing the USD to skyrocket, with the exchange rate moving from 27 upward. It wasn’t until September 2024, when the Fed ended its high-interest cycle and began cutting rates, that the exchange rate returned to around 32.

This history reveals a core logic: the movement of the TWD against the USD is mainly determined by Fed policies, not Taiwan’s central bank.

How Different Investors Can Capture the TWD Appreciation Opportunity

Advanced Strategies for Forex Traders

For investors experienced in FX trading and with higher risk tolerance, consider directly trading USD/TWD or related currency pairs on forex platforms to seize short-term volatility, including intraday trading. If you already hold USD assets, derivatives like forward contracts can be used to hedge and lock in gains from TWD appreciation.

Prudent Approaches for Beginner Investors

For novice investors wanting to participate in this volatility, remember these principles: start with small amounts, avoid impulsive leverage increases; many trading platforms offer demo accounts—use virtual funds to test strategies; and keep a close eye on Taiwan’s central bank actions and US-Taiwan trade developments, as these will directly influence exchange rates.

Long-Term Portfolio Allocation Ideas

For long-term investors, Taiwan’s solid economic fundamentals and booming semiconductor exports suggest the TWD may continue to fluctuate within the 30 to 30.5 range. It’s advisable to limit FX exposure to 5-10% of total assets, use low leverage for USD/TWD trades, and set stop-loss orders to protect against adverse moves. Remaining funds can be diversified into Taiwan stocks, bonds, and other global assets to reduce overall portfolio risk.

Market Outlook: Will the TWD Continue to Appreciate?

UBS’s latest report emphasizes that, although recent gains are substantial, multiple indicators suggest the TWD’s appreciation trend will persist. FX derivatives markets show the “strongest appreciation expectation in five years,” and historical experience indicates that large single-day surges are often followed by a period of stabilization rather than immediate reversal.

However, investors should avoid premature counter-trend operations. UBS forecasts that when the central bank’s tolerance approaches its limit (trade-weighted index up about 3%), official intervention may intensify. Additionally, if insurers and exporters further increase hedging, it could trigger USD selling pressure of around $100 billion—about 14% of Taiwan’s GDP—posing a significant potential risk.

In summary, the TWD will continue to appreciate, but the upside is limited, and policy intervention risks should not be underestimated. For investors, it’s crucial to target the 30 to 30.5 NT dollar zone, establish clear entry and exit plans, and be prepared for this wave of exchange rate volatility.