USD/TWD trend reverses! From depreciation panic to breaking the 30 mark, an in-depth analysis of the real story behind it

Why Is the NT Dollar Surging? Three Major Factors Igniting the Appreciation Engine

Remember a month ago? The market was filled with pessimistic expectations about Taiwan’s economy—fear that the New Taiwan Dollar might break through 34, or even 35. No one expected that, in just 30 days, the USD/TWD exchange rate would perform a dramatic reversal.

The events that occurred in early May are considered extraordinary in the foreign exchange market: on May 2nd, the NT dollar appreciated 5% against the US dollar in a single day, setting a 40-year record for the largest single-day gain; on May 5th, the rally continued, breaking the psychological 30-dollar mark intraday, with a low of 29.59. In just two trading days, the NT dollar appreciated nearly 10%, triggering the third-largest trading volume in history in the forex market.

What exactly has fueled this powerful appreciation trend?

The first driver is Trump’s tariff policies. When the Trump administration announced a 90-day delay on reciprocal tariffs, two bright spots appeared in the global markets: first, international companies might concentrate procurement from Taiwan to avoid tariffs; second, the IMF unexpectedly raised Taiwan’s economic growth forecast. These positive signals exploded like firecrackers, causing foreign capital to flood into Taiwan’s market, becoming the first wave of energy behind the NT dollar’s appreciation.

The second driver stems from the central bank’s policy dilemma. On May 2nd, although the central bank issued an emergency statement, it was vague on the most concerning issue—whether US-Taiwan negotiations involved currency clauses. In fact, the Trump administration’s “Fair and Reciprocal Trade Plan” explicitly listed “currency intervention” as a review target, putting the central bank in an awkward position: intervening could be accused of currency manipulation; not intervening, and the NT dollar would continue to appreciate due to Taiwan’s large trade surplus. Taiwan’s trade surplus with the US surged 134% to USD 22.09 billion in the first quarter. Without the central bank’s intervention, the upward pressure on the NT dollar would be unstoppable.

The third driver is the chain reaction within the financial system. According to UBS’s latest research, Taiwanese insurers hold up to USD 1.7 trillion in overseas assets (mainly US Treasuries), but long-term they lack sufficient currency hedging tools. Previously, they dared to do this because the Taiwan central bank could effectively suppress the NT dollar’s rise. But now, the situation has changed—fearing intervention might attract the US Treasury’s attention, insurers panic and rush to hedge their USD assets, which ironically further pushes up USD/TWD. The Financial Times even pointed out that the main driver of this appreciation wave is the hedging trend among life insurers. However, central bank Governor Yang Jinlong later denied this.

What Will the USD/TWD Trend Look Like in the Future? How Much Room Is Left for Appreciation?

Having broken the 30 mark, the most pressing question for investors is: will it keep rising?

The market consensus is: it’s unlikely to go much higher.

Industry experts generally believe that the possibility of the NT dollar reaching 28 per USD is very slim. To assess whether this is reasonable, the BIS (Bank for International Settlements)’s real effective exchange rate (REER) index provides an important reference. This index uses 100 as the equilibrium value; above 100 indicates overvaluation, below 100 indicates undervaluation.

As of the end of March:

• USD REER is about 113 → clearly overvalued
• NT dollar REER is about 96 → reasonably undervalued
• JPY REER is only 73 → more undervalued
• KRW REER is 89 → also undervalued

From the data, the NT dollar still has room to appreciate, but not much.

Looking at a longer time frame from the start of the year, the appreciation of the NT dollar is actually in sync with other major regional currencies: NT dollar up 8.74%, Japanese Yen up 8.47%, Korean Won up 7.17%. In essence, everyone is rising; the NT dollar has only recently caught up with this appreciation wave.

UBS’s latest report is candid: although the recent surge in the NT dollar is fierce, from valuation models, forex derivatives market expectations, and historical trends, the appreciation trend is likely to continue. Valuation models show the NT dollar has shifted from moderate undervaluation to a relatively fair value, exceeding 2.7 standard deviations; forex derivatives market indicates the strongest appreciation expectation in five years; historical experience suggests that after a sharp daily rise, a correction is unlikely to happen immediately.

However, UBS also issues an implicit risk warning: when the trade-weighted index of the NT dollar rises another 3% (approaching the central bank’s tolerance limit), the authorities might step up intervention to stabilize volatility.

Seizing Opportunities in USD/TWD: Three Investment Strategies

To profit from this trend, strategies vary depending on the individual.

For experienced forex traders: directly trade USD/TWD or related currency pairs on forex platforms, capturing short-term fluctuations over a few days or even within the day, is the most straightforward approach. If you already hold USD assets, you can also lock in appreciation gains through derivatives like forward contracts, while hedging your risk.

For newcomers to forex: the temptation is high, but so are the risks. Remember three principles: first, start small—test the waters with limited funds and avoid impulsively adding more; second, set stop-loss points to protect yourself—do not let a single loss exceed 2% of your total capital; third, practice on demo accounts to test your trading strategies. Many forex platforms offer demo trading with virtual funds, allowing you to refine your skills. Also, keep a close eye on the latest moves by Taiwan’s central bank and developments in US-Taiwan trade negotiations, as these will directly influence USD/TWD trends.

For long-term asset allocators: Taiwan’s economic fundamentals are solid, with booming semiconductor exports. The NT dollar is likely to oscillate within the 30 to 30.5 range for the long term. But remember an investment rule: foreign exchange positions should not exceed 5%-10% of total assets; the remaining funds should be diversified across global assets to manage risk. Consider low-leverage USD/TWD operations to earn steady FX spreads. Additionally, combining investments in Taiwanese stocks or bonds can further hedge against volatility in a single asset class.

Looking Back Over Ten Years: A Decade of USD/TWD Trends

To understand how “abnormal” the current USD/TWD movement is, look at what happened over the past decade.

From October 2014 to October 2024, the NT dollar traded between 27 and 34 against the USD, with a volatility of about 23%. In comparison, the Japanese Yen fluctuated between 99 and 161, with a volatility of 50%, twice that of the NT dollar. This indicates that the NT dollar is relatively stable.

The key driver of the NT dollar’s rise and fall is not the Taiwan central bank but the Federal Reserve. The story of USD/TWD is essentially a story of Fed policy.

Between 2015 and 2018, amid Chinese stock market volatility, the European debt crisis aftermath, and the Fed slowing its balance sheet reduction and even restarting quantitative easing, the NT dollar strengthened. After 2018, as the Fed judged the economy to be improving, it began raising interest rates and planned to shrink its balance sheet gradually. But in 2020, with the pandemic hitting suddenly, the Fed reversed course—expanding its balance sheet from USD 4.5 trillion to USD 9 trillion and lowering interest rates near zero. In this ultra-loose environment, the dollar weakened, and the NT dollar soared, even reaching a historic low of 27 to 1 USD.

The turning point came in 2022. US inflation spiraled out of control, forcing the Fed to accelerate rate hikes. The dollar regained strength, and the NT dollar depreciated from 27, climbing back. It wasn’t until September 2024, when the Fed announced the end of its high-interest cycle and began cutting rates, that the USD/TWD trend showed signs of easing again.

Historical lessons also tell us: after the 2008 financial crisis, the Fed launched three rounds of quantitative easing. In December 2013, when the Fed announced slowing the third round of QE, US interest rates rose, capital flowed back to the US from emerging markets, and the USD/TWD exchange rate rose steadily, peaking at 33, creating a long-term appreciation cycle lasting over a decade.

From a decade of experience, investors have a rough sense of the “rules”: most believe that USD below 30 is a good buy, above 32 consider selling. For long-term FX investment, using 30 and 32 as psychological reference points for periodic positioning and trimming is a reasonable approach.