Deep Dive into the Federal Reserve's Rate Hike Cycle: How Taiwan's Economy is Responding to the US Dollar Appreciation Impact

The Historical Context of the Federal Reserve’s Aggressive Rate Hikes

Since the start of the rate hike cycle in March 2022, the Federal Reserve has cumulatively raised interest rates by 500 basis points within just over a year, causing the benchmark rate to jump rapidly from near-zero levels of 0-0.25% to the current 5.00%-5.25%. This round of aggressive rate hikes is unprecedented in history—at each of the ten Federal Open Market Committee (FOMC) meetings, the Fed chose to raise rates, especially during mid-2022 when it consecutively increased by 75 basis points for four months (June, July, September, November). Such intensive rate hikes have never been seen in previous three tightening cycles.

The fundamental driver behind this aggressive rate hike cycle is the strict containment of high inflation. In June 2022, the US Consumer Price Index (CPI) hit a 40-year high, serving as a critical backdrop forcing the Fed to act. Although inflation has entered a downward trend, it remains far from the 2% target. Coupled with the banking crisis risks faced by the financial system in 2023, markets generally believe that further rate hikes are still possible.

The 2024 Federal Reserve Policy Timeline and Market Expectations

According to the latest estimates from the CME FedWatch Tool, the Fed is expected to continue a moderate adjustment of interest rates in 2024. Below are key meeting dates and expected rate levels:

This process reflects market expectations of a gradual easing of monetary policy, but actual implementation will still depend on economic data.

The Ripple Effect of Rate Hikes: Multiple Impacts Across Global Assets

Rate hikes are not isolated events; their ripple effects spread across global financial markets.

The Strong Response of the US Dollar and Forex Markets

Rising interest rates directly boost the attractiveness of the US dollar. When US bank deposit yields increase, investors worldwide flock to dollar assets, pushing up the dollar index. The 8.5% rise of the dollar index in 2022 is a direct illustration of this mechanism. An appreciating dollar makes dollar-denominated assets cheaper, intensifying global capital flows into the US.

Stock Markets Facing Valuation and Cost Pressures

The impact of rate hikes on equities comes from two dimensions: first, in asset pricing models, interest rates and asset values are inversely related—the higher the rates, the lower the valuations; second, rising corporate financing costs directly erode profit margins. The sharp declines of 17% in the S&P 500 and 30% in the Nasdaq in 2022 confirm this pattern. However, in 2023, stock markets began to rebound as investors anticipated the Fed would pause or even start cutting rates at the end of the cycle. Market psychology often leads policy expectations to drive markets ahead of actual policy changes.

Gold as a “Contrarian Indicator”

Gold tends to move inversely to rate hike expectations. When markets anticipate increased rate hikes, gold prices are pressured; when expectations ease, gold rises. Looking at 2022, gold prices declined until November, then reversed and moved upward—this shift coincides with the market transitioning from “continued rate hikes” to “rate cut expectations.”

Bond Market Pressure and Banking Risks

Bond prices and interest rates move inversely. Rate hikes inevitably depress bond markets. The 2023 US banking crisis partly stems from this—banks holding large amounts of bonds saw their values shrink as rates rose, and faced deposit withdrawals, forcing them to sell bonds at low prices to raise cash, creating a vicious cycle. This case clearly demonstrates how rate hike policies propagate through the financial system, ultimately triggering systemic risks.

The Domestic Impact of Rate Hikes in Taiwan: Chain Reactions of Currency Depreciation

Taiwan Dollar Depreciation and Imported Inflation

The direct consequence of US rate hikes is the appreciation of the dollar and the relative depreciation of the Taiwan dollar. When the Taiwan dollar weakens, the cost of imported goods priced in dollars rises, fueling imported inflation. In 2022, Taiwan’s food CPI increased by 6%, with eggs soaring by 26%. One of the drivers behind these increases is rising feed costs—mainly imported corn, sorghum, and other raw materials. Data shows that 22.8% of Taiwan’s imported agricultural products come from the US. The dollar appreciation triggered by rate hikes directly pushed up the prices of these goods in Taiwan dollars.

Although Taiwan’s central bank has also raised interest rates (a total of 75 basis points as of 2023), it is far less aggressive than the Fed, making it difficult to effectively halt the depreciation trend of the Taiwan dollar.

The “Siphon Effect” of Capital Outflows

The deeper consequence of currency depreciation is capital outflow. Imagine an overseas investor exchanging $100,000 for 2.7 million TWD to buy Taiwanese stocks. If the TWD depreciates by 11% against the dollar during the year, the original 3 million TWD investment can now only be exchanged for $97,000, resulting in a loss. This calculation inevitably prompts large-scale selling—investors rush to convert stocks into cash and buy dollars to hedge risks, leading to significant capital outflows. According to the Taiwan Stock Exchange, in 2022, capital outflows from Taiwan’s stock market reached $41.6 billion, the highest in Asia, accounting for over 70% of total outflows.

The Dual Pressure and Divergence Opportunities in Taiwan’s Stock Market

US rate hikes exert twofold pressure on Taiwan’s stock market: first, capital outflows driven by TWD depreciation; second, local interest rate hikes prompted by the Taiwan Central Bank’s follow-up, which directly impact stock valuations. In 2022, Taiwan’s weighted index fell by 21%, ranking sixth from the bottom among global markets—this is the result of these dual pressures.

However, the rate hike cycle is not entirely negative. Financial stocks, especially bank stocks, tend to be winners in a rising rate environment. Higher interest rates expand the net interest margin, boosting banks’ profits. For example, Taiwan Cooperative Bank’s interest income in 2022 reached NT$33.3 billion, up 38% year-over-year, with its stock price rising 20% within a year. For investors seeking to capitalize on this opportunity, besides directly buying individual stocks, related financial ETFs are also convenient options.

Investors’ Toolbox for Response

In facing a rate hike cycle, investors have several strategies:

Step 1: Seize the Opportunity of US Dollar Appreciation

US rate hikes will inevitably strengthen the dollar, making dollar investments the most direct way to profit. Besides traditional currency exchange at banks, futures and Contracts for Difference (CFDs) offer more flexible options. CFDs are especially suitable for small investors, providing high leverage—allowing the establishment of dollar positions with minimal initial capital.

Step 2: Optimize Stock Portfolio Structure

In a rising rate environment, proactively reduce holdings of overvalued stocks (especially tech stocks) and increase allocations to high-dividend-yield assets—financial stocks are ideal substitutes. This approach maintains income while reducing valuation risks.

Step 3: Use Hedging Tools to Diversify Risks

Taiwan’s stock market is highly correlated with the Nasdaq 100. By shorting Nasdaq futures or related derivatives, investors can hedge against declines in the Taiwan market. The “Long Taiwan, Short Nasdaq” strategy is particularly effective early in a rate hike cycle.

Conclusion

US rate hikes have profound and complex impacts on Taiwan’s economy—from currency depreciation, imported inflation, capital outflows, to stock market pressures. Each link affects ordinary investors’ assets. But as market history shows, risks and opportunities often coexist. By investing in dollars, allocating financial stocks, and flexibly using hedging tools, investors can turn losses into gains during a rate hike cycle. It’s important to note that the end of a rate hike cycle often signals a reversal—timely grasping the policy shift window is crucial for long-term gains.