Under the trend of the US dollar appreciating, why did the New Taiwan dollar surge past 30? USD/NTD outlook and investment strategies

Just Two Days, TWD Surges 10%, a Contrarian Move Amid USD Appreciation

The New Taiwan Dollar has recently staged a jaw-dropping appreciation show. Against the global backdrop of USD strengthening, the TWD has defied the trend and soared sharply, gaining nearly 10% in just two trading days, a rare phenomenon among Asian currencies.

On May 2, the TWD/USD exchange rate jumped 5% in a single day, setting a 40-year record for the largest single-day gain, closing at 31.064, a 15-month high. The following week, on May 5, the TWD continued its rally, rising another 4.92%, and during the trading session, it broke the psychological barrier of 30, reaching a high of 29.59. This astonishing appreciation speed triggered the third-highest trading volume in the history of the foreign exchange market.

Compared to other Asian currencies, the Singapore dollar appreciated 1.41%, the Japanese yen rose 1.5%, and the Korean won surged 3.8%. However, these gains are far less than the TWD’s rapid surge. Notably, from the beginning of this year to early April, the TWD was actually in a 1% depreciation predicament, and the dramatic reversal within a month truly shocked the market.

Three Forces Driving the TWD Higher, USD Appreciation Expectations as a Key Variable

Trump’s Tariff Policies and Foreign Capital Inflows

In the context of USD appreciation, the Trump administration announced a 90-day delay in implementing reciprocal tariffs, which became the trigger for the TWD’s reversal. The market quickly formed two main expectations: first, global traders would concentrate on purchasing Taiwanese goods to seize the window before tariff changes; second, the International Monetary Fund (IMF) unexpectedly raised Taiwan’s economic growth forecast, coupled with strong performance of the Taiwan stock market, attracting a large influx of foreign capital.

Central Bank Dilemma and Market Concerns

On May 2, the Central Bank issued a statement attributing currency fluctuations to “market expectations that trading partners’ currencies may appreciate due to the US,” but made no mention of whether exchange rate clauses were involved in US-Taiwan trade negotiations. This silence itself is telling—Taiwan’s trade surplus in the first quarter reached USD 23.57 billion, up 23% year-on-year, with the surplus with the US soaring 134% to USD 22.09 billion. Under the dual pressures of USD appreciation and US pressure, the upward pressure on the TWD is indeed substantial.

The US government’s “Fair and Reciprocal Trade Plan” explicitly lists “currency intervention” as a key review point, putting the Central Bank in a dilemma: on one hand, worried about the TWD being passively appreciated amid USD strength; on the other, reluctant to intervene forcefully in the forex market as in the past to avoid being labeled a currency manipulator.

Financial Industry Hedging Operations Concentrate on Closing Positions

UBS’s latest research indicates that large-scale currency hedging operations by Taiwanese insurers and exporters, along with the concentrated closing of TWD financing arbitrage trades, have collectively amplified this wave of volatility. UBS estimates that restoring foreign exchange hedging to trend levels alone could trigger about USD 100 billion in USD selling pressure, equivalent to 14% of Taiwan’s GDP.

Taiwan’s life insurance industry holds overseas assets worth up to USD 1.7 trillion (mainly US Treasuries), yet has long lacked sufficient currency hedging measures. The reason is that “in the past, the Central Bank could effectively suppress significant TWD appreciation,” but under the dual pressures of USD appreciation and US concerns, this protective shield is disappearing. Although Central Bank Governor Yang Jinlong later clarified that life insurers had not significantly increased operations, market doubts remain.

How Much Further Can the TWD Appreciate in the Era of USD Appreciation?

The 28-Per-Dollar Level Is Difficult to Break

Although ongoing US tariff negotiations continue to pressure the TWD to appreciate, industry insiders generally believe that the probability of the TWD reaching 28 per USD is very low. While the global trend of USD appreciation will tend to push the TWD higher, the tolerance limit of Taiwan’s central bank and market structural constraints will serve as balancing factors.

Valuation Indicators Signal Caution

The Bank for International Settlements (BIS) compiled the Real Effective Exchange Rate (REER) index as an important reference. The index uses 100 as the equilibrium value; above 100 indicates potential overvaluation, below 100 suggests undervaluation risk.

As of the end of March:

• USD Index was about 113, indicating a significant overvaluation (USD is quite appreciated)
• TWD index remained around 96, in a reasonably undervalued state (still room for appreciation)
• JPY index was only 73, and KRW index 89 (most major Asian export currencies are generally undervalued)

The Truth About Regional Currencies Rising Simultaneously

If we extend the observation period from the beginning of the year to now:

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

Although the recent surge of the TWD is fierce, from a broader perspective, its appreciation speed is basically synchronized with regional currencies. This indicates that the TWD’s appreciation is more a reflection of the overall Asian currency trend rather than an anomaly.

UBS’s Optimistic Outlook

UBS believes the TWD will continue to appreciate. Their analysis shows that the valuation model indicates the TWD has shifted from moderate undervaluation to a fair value that is 2.7 standard deviations higher; the foreign exchange derivatives market shows the “strongest appreciation expectation in five years”; and historical experience suggests that after similar large single-day gains, immediate correction is unlikely.

However, UBS also predicts that when the trade-weighted index of the TWD rises another 3% (approaching the central bank’s tolerance limit), the authorities will step up intervention to smooth exchange rate fluctuations.

How to Position the TWD in a USD Appreciation Environment?

Experienced Traders’ Strategies

For seasoned foreign exchange investors, there are two ways to profit: first, directly trading USD/TWD or related currency pairs on forex platforms to capture short-term volatility, including intraday trading; second, if holding USD assets, using derivatives such as forward contracts to hedge and lock in gains from TWD appreciation in advance.

Conservative Advice for Beginners

New investors aiming to participate in this wave of volatility should remember the following principles: first, start with small amounts to test the waters and gradually refine your trading approach; second, avoid impulsive increases—maintaining a stable mindset is more important than large one-off trades; third, utilize demo accounts to test strategies. Many forex platforms offer simulated accounts, allowing beginners to practice in a virtual environment before trading with real funds.

Asset Allocation for Long-Term Investors

For long-term investors, the TWD is expected to oscillate between 30 and 30.5, showing relative strength in the medium to long term. However, currency positions should not exceed 5%-10% of total assets; the remaining funds should be diversified into other global assets to reduce risk concentration.

Specific operational suggestions:

• Use low-leverage trading for USD/TWD, with stop-loss orders to protect principal
• Keep close tabs on the Central Bank’s moves and US-Taiwan trade negotiations, adjusting positions timely
• Combine investments in Taiwan stocks or bonds to form a more balanced portfolio
• Regularly review foreign exchange exposure to prevent currency fluctuations from impacting overall assets

A Decade in Review: The Rhythm of USD and TWD Fluctuations

Over the past decade (October 2014 to October 2024), USD/TWD has oscillated between 27 and 34, with a volatility of 23%. Compared to other currencies worldwide, the TWD has been relatively stable. The JPY/USD exchange rate experienced a volatility of up to 50% (from 99 to 161), twice that of the TWD.

The actual dominant factor in TWD’s ups and downs is the Federal Reserve’s policy, not Taiwan’s central bank. The detailed context is as follows:

2015 to mid-2018: The US slowed the pace of balance sheet reduction and continued quantitative easing, leading to a strengthening of the TWD.

Post-2018: The US initiated a rate hike cycle, aiming to maintain high interest rates and shrink its balance sheet. However, the COVID-19 pandemic in 2020 caused the Fed to expand its balance sheet rapidly, from USD 4.5 trillion to USD 9 trillion, with rates dropping to zero. The USD depreciated, and the TWD surged to 27.

Post-2022: US inflation spiraled out of control, prompting the Fed to raise interest rates sharply, causing the USD to appreciate again. Driven by USD strength, the exchange rate rebounded from 27 to around 33, until September 2024, when the Fed ended its rate hike cycle and began cutting rates, bringing the exchange rate back to around 32.

Historical data shows that during USD appreciation periods, the TWD/USD exchange rate mostly fluctuates between 30 and 32. An “invisible ruler” exists in the market: most investors believe that when USD is below 30, it’s a good buy; above 32, it’s time to sell.

For long-term currency trading, this can serve as a reference standard.

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