The economic test Taiwan faces under the US interest rate hike cycle

The Rate Hike Process Has Been Settled

Since the start of rate hikes in March 2022, the Federal Reserve has cumulatively raised the benchmark interest rate by 20 basis points, with the rate range soaring from near zero to 5%–5.25%. The magnitude and speed of this rate hike cycle are unprecedented in the past decade. Especially between June and November 2022, the Fed raised interest rates four times by 75 basis points each, setting a record.

Why such aggressive rate hikes? Simply put, inflation in the US reached a 40-year high in June 2022, forcing the Fed to take aggressive measures. Although inflation has eased since then, it is still far from the 2% target. According to market expectations, there is still a possibility of rate cuts in 2024, but the timing remains highly uncertain.

Chain Reactions from Rate Hikes

Reshuffling in the Forex Market

The most direct effect of rate hikes is the appreciation of the US dollar. When US bank deposit interest rates rise, global investors rush to buy US dollar deposits, causing demand for the dollar to surge. In 2022, the US dollar index increased by 8.5%, reaching multi-year highs.

The impact on Taiwan is most evident: the New Taiwan Dollar (NTD) depreciates accordingly. The NTD has depreciated by 11% against the US dollar, which is not just a change in exchange rate figures but directly affects everyone’s wallets.

Logic Behind Stock Market Pressure

The logic behind rate hikes impacting the stock market has two aspects: First, in a high-interest-rate environment, company valuations decline—because investors can earn higher returns through low-risk deposits and are less willing to pay high prices for stocks; second, rising financing costs squeeze corporate profits.

In 2022, global stock markets were bleak, with Taiwan’s weighted index falling 21%, ranking sixth from the bottom globally. Capital outflows reached $41.6 billion, the largest in Asia. However, in 2023, the stock market began to bottom out and rebound, driven by market expectations of possible rate cuts.

Gold and Bonds in Two Different Worlds

Gold’s performance during rate hikes is complex—not simply bearish. The key lies in market expectations of Federal Reserve policies. In 2022, gold prices fell sharply amid strong rate hike expectations, but once markets started to anticipate rate cuts, gold prices rebounded.

The bond market is more straightforward—rate hikes lead to falling bond prices, which even triggered the US banking crisis in 2023. Banks holding large amounts of devalued bonds suffered losses and, under withdrawal pressures, had to sell assets at discounted prices, creating a vicious cycle.

Real Challenges Facing Taiwan’s Economy

Inflation Transmission via Rising Import Costs

The most direct consequence of NTD depreciation is inflation. In 2022, Taiwan’s food CPI rose by 6%, with eggs up 26%. This is because US agricultural imports account for 22.8% of Taiwan’s imports, and feed and grains are priced in USD. The US dollar’s appreciation directly pushes up import prices.

The Central Bank also raised interest rates five times (a total of 75 basis points) to counteract NTD depreciation. However, compared to the aggressive moves of the Federal Reserve, these measures have limited effect, and the NTD remains under pressure.

Hidden Risks of Capital Outflows

Another serious consequence of rate hikes is capital outflow. Imagine an overseas investor: exchanging $100,000 for 2.7 million NTD to buy Taiwanese stocks, earning 300,000 NTD in a year—should be happy. But an 11% depreciation of the NTD means that those 3 million NTD can only be exchanged back for $97,000, resulting in a loss. As a result, they sell off stocks en masse to convert to USD and hedge risks—if this behavior becomes widespread, it can trigger stock market volatility.

Who Benefits from Rate Hikes

Not all stocks are losers in a rate hike environment. Financial stocks, especially bank stocks, benefit the most. Rate hikes expand banks’ interest margin on deposits and loans, directly increasing profits. For example, Taiwan Cooperative Bank’s interest income increased by 38% in 2022, with its stock price rising 20%.

This suggests that ordinary investors can consider increasing allocations to high-dividend-yield stocks and financial ETFs while adjusting their overall portfolio.

Investor Strategies

Strategy 1: Seize the Opportunity of US Dollar Appreciation

US rate hikes → US dollar appreciation. This is the most certain logical chain. Small investors can participate in the USD appreciation trend through futures, CFDs, and other instruments, requiring only a small amount of capital to establish positions.

Strategy 2: Optimize Stock Portfolio Structure

Reduce holdings of high-valuation stocks (especially Tech Stocks), and increase allocations to high-dividend-yield stocks. This way, investors can participate in the stock rebound while earning stable cash flow and reducing portfolio volatility.

Strategy 3: Use Short Positions for Hedging

Taiwan’s stock market is highly correlated with US stocks. When bearish on the market, investors can hedge by shorting indices like Nasdaq to offset risks of decline in Taiwan stocks. This is a common risk management technique among professional investors.

Key Takeaways

The US rate hike cycle has a tangible impact on Taiwan’s economy—from NTD depreciation and rising inflation to stock market volatility and capital outflows. But opportunities often hide within crises. Moderate asset reallocation can both defend against the impact of rate hikes and capture phase opportunities.

Especially, the end of a rate hike cycle often signals a trend reversal. When the Fed signals rate cuts, many previously depressed assets may experience a sharp rebound. Early positioning and pacing are the keys to winning in this cycle.