How big is the impact of US interest rate hikes on the Taiwanese dollar? Federal Reserve policy changes in 2024 and what Taiwanese investors must know

The Background of the Fed’s Aggressive Rate Hikes

Since the start of the rate hike cycle in March 2022, the actions taken by the U.S. Federal Reserve have been unprecedentedly aggressive. By the end of 2023, the Fed had cumulatively raised the benchmark interest rate by 20 basis points (500 bps), pushing the rate from 0–0.25% to the 5.00%–5.25% range. The rapid and substantial pace of these rate hikes is primarily due to the U.S. inflation index reaching a 40-year high in June 2022, making inflation pressures urgent.

Impressively, during June, July, September, and November 2022, the Fed consecutively raised rates by 75 basis points four times in a row, an extremely rare occurrence in history. Although inflation has begun to recede, it remains some distance from the 2% target. Coupled with financial stability issues that erupted in 2023, markets believe the Fed may continue to adjust interest rates in the future.

Overview of the Fed’s 2024 Meeting Schedule

Based on market expectations, here are the key decision dates for the Federal Reserve in 2024 (Taiwan time):

(Source: CME FedWatch Market Expectations)

The Direct Impact of U.S. Rate Hikes on the TWD

How will U.S. rate hikes affect the New Taiwan Dollar (TWD)? The logic is quite simple: raising interest rates increases the yield on U.S. bank deposits, attracting large amounts of foreign capital to the U.S. market to earn higher returns, which leads to increased demand for the dollar and its appreciation. The 8.5% rise in the U.S. dollar index in 2022 is proof of this.

When the dollar appreciates, import costs measured in TWD also rise. Taiwan’s imports are mostly settled in USD, including agricultural products, energy, and raw materials, causing prices to surge across the board. In 2022, U.S. imports of agricultural products accounted for 22.8% of Taiwan’s total imports. As a result, Taiwan’s food CPI increased by 6%, with egg prices soaring by 26%—mainly because feed ingredients like corn, barley, and wheat are heavily imported from the U.S.

Although Taiwan’s central bank also raised interest rates five times since 2022, totaling 75 basis points, the effect was limited compared to the Fed’s aggressive moves, and it could not effectively prevent the TWD from depreciating. The depreciation of the TWD has led to persistent inflation, putting heavy pressure on Taiwan’s import-dependent economy.

How U.S. Rate Hikes Trigger Capital Outflows

The depreciation of the TWD can also trigger another serious consequence—capital outflows. Suppose you are a foreign investor exchanging $100,000 USD for 2.7 million TWD to invest in Taiwan stocks, earning a profit of NT$300,000 in a year. But if the TWD depreciates by 11% against the USD (as in 2022), then NT$3 million can only be exchanged back for $97,000 USD, resulting in a loss.

To protect their capital, investors may need to sell off holdings massively and convert TWD into USD as a hedge. When many investors do this simultaneously, Taiwan’s stock market faces enormous pressure. In 2022, capital outflows from Taiwan’s stock market reached $41.6 billion, ranking first in Asia, accounting for over 70%.

The Dual Impact of U.S. Rate Hikes on Taiwan’s Stock Market and Financial Stocks

Rate hikes are a double-edged sword for Taiwan’s stock market. On the negative side, TWD depreciation leads to capital outflows, and the central bank’s rate hikes increase domestic interest rates, which can lower stock valuations—especially impacting high-valuation stocks like tech stocks. In 2022, Taiwan’s weighted index fell by 21%, ranking sixth from the bottom globally, with the S&P 500 down 17% and the Nasdaq down 30% the same year.

However, financial stocks benefit from rate hikes. Higher interest rates widen banks’ deposit and loan spreads, directly increasing bank profits. For example, Taiwan Cooperative Bank’s interest income grew by 38% year-over-year to NT$33.3 billion in 2022, and its stock price increased by 20% over the past year.

Investment Strategies in a Rate Hike Environment

In response to the impact of U.S. rate hikes, investors should adopt proactive strategies:

First, moderately increase allocation to USD assets. The clear upward trend of the USD means investing in USD can directly benefit from exchange rate appreciation. Tools like currency exchange, FX futures, and others can be utilized.

Second, adjust stock portfolio structure. Reduce holdings in high-valuation stocks like tech stocks, and increase allocations to financial stocks, utilities, and other high-dividend-yield assets. This can reduce volatility risk and benefit from the improved profitability brought by rate hikes.

Third, use short-selling tools for hedging. The Taiwan Weighted Index and Nasdaq 100 are highly positively correlated. By appropriately shorting U.S. tech indices, investors can partially offset losses in Taiwan stocks.

Conclusion

U.S. dollar rate hikes have multiple layers of impact on the TWD: depreciation leads to rising import prices and inflation; capital outflows impact stock market performance; valuation pressures threaten overall stock prices. However, crises also contain opportunities—investors can seek gains through USD allocation, increased financial stock holdings, and index hedging strategies during the rate hike cycle. It’s important to note that the end of a rate hike cycle often signals a market reversal, so timing is crucial.