The New Taiwan Dollar breaks through the 30 mark! Will the US dollar continue to rise in the forecast for 2025?

The New Taiwan Dollar (NTD) has decisively broken through the psychological barrier of 30 yuan, and this wave of appreciation has become a market focus. In just two trading days, the NTD has surged nearly 10%, setting multiple historical records and triggering astonishing trading volumes in the foreign exchange market. From concerns a month ago that the NTD might break below 35 yuan, to now a single-day spike of 5% reaching a 40-year high, the rapid change in circumstances is astonishing. Where will the exchange rate of the NTD go? Is this appreciation a short-term fluctuation or the beginning of a long-term trend?

Three-layer analysis of the factors behind the NTD appreciation

The central bank policy dilemma becomes a key variable

On May 2, the day the NTD surged sharply, the central bank’s response drew market attention. Although the central bank issued a statement attributing the volatility to “market expectations that the US may request trading partners’ currencies to appreciate,” it did not directly address the most pressing concern: whether the US-Taiwan tariff negotiations involve exchange rate clauses.

The Trump administration explicitly listed “currency intervention” as a focus of review, placing the central bank in an unprecedented dilemma. Taiwan’s trade surplus in the first quarter reached $23.57 billion, up 23% year-on-year, with the US trade surplus soaring 134% to $22.09 billion. If the central bank cannot intervene strongly in the forex market as in the past, the NTD will face enormous upward pressure. This is the most uncertain part of USD trend forecasts.

Tariff policies become a trigger for appreciation

After the Trump administration announced a 90-day delay in implementing reciprocal tariffs, market expectations shifted significantly. First, a wave of centralized procurement is expected globally, and Taiwan, as an export-oriented economy, has short-term positive prospects for exports. Second, the IMF unexpectedly raised Taiwan’s economic growth forecast, coupled with strong performance in the Taiwan stock market, these positive news have led to a frenzy of foreign capital inflows, becoming the main driver of the NTD’s appreciation.

Financial institutions’ hedging operations amplify volatility

A UBS research report pointed out that the abnormal volatility on May 2 exceeded what traditional economic indicators could explain. Large-scale forex hedging operations by Taiwanese insurers and corporations, along with concentrated unwinding of NTD financing arbitrage trades, collectively caused this intense exchange rate fluctuation.

The report specifically warns that if forex hedging scales revert to trend levels, it could trigger about $100 billion in USD selling pressure, equivalent to 14% of Taiwan’s GDP. The Financial Times further notes that Taiwanese life insurers hold up to $1.7 trillion in overseas assets, and long-term lack of sufficient hedging measures is mainly due to the past ability of the central bank to effectively suppress significant NTD appreciation. But now, the central bank is caught in a dilemma, worried that intervention might be labeled as currency manipulation by the US Treasury.

USD trend forecast: Will the exchange rate continue to rise?

The 28 yuan barrier is hard to break: Although the market generally expects the Trump administration to pressure the NTD to continue appreciating, most industry insiders believe that the possibility of the NTD reaching 28 yuan to 1 USD is very low.

What valuation indicators tell us: The BIS (Bank for International Settlements) compiled real effective exchange rate (REER) indices provide important references. As of the end of March:

• The US dollar index is about 113, indicating a significant overvaluation
• The NTD index remains around 96, in a reasonably undervalued state
• The yen and Korean won indices are only 73 and 89, respectively, showing more pronounced undervaluation

Comparison with regional currencies: Extending the observation period from the beginning of the year to now, the appreciation of the NTD is roughly in line with the yen and won:

• NTD up 8.74%
• Yen up 8.47%
• Won up 7.17%

While the recent surge of the NTD appears fierce, from a longer-term perspective, its trend remains synchronized with regional currencies.

UBS’s latest view: Although the NTD has recently performed strongly, multiple indicators suggest the appreciation trend will continue. Valuation models show the NTD has shifted from moderate undervaluation to a fair value that is 2.7 standard deviations higher; forex derivatives markets indicate the “strongest appreciation expectation in five years”; and historical experience shows that similar large single-day increases often do not immediately reverse.

UBS advises investors not to prematurely take contrarian positions, but expects that when the trade-weighted index of the NTD rises another 3% (approaching the central bank’s tolerance limit), official intervention may intensify.

A decade of exchange rate trends: a historical context

Over the past decade (October 2014 to October 2024), the NTD/USD exchange rate has fluctuated between 27 and 34, a volatility of about 23%, relatively small compared to global currencies. In contrast, the USD/JPY rate has fluctuated between 99 and 161, a volatility of 50%, twice that of the NTD.

The smaller fluctuation of the NTD is mainly due to limited interest rate changes, so its rise and fall are primarily determined by US Federal Reserve rate hikes and cuts:

2015–2018: During the Chinese stock market crash and European debt crisis, the US slowed down QT (quantitative tightening) and continued QE, leading to a strengthening of the NTD.

Post-2018: The US began a rate hike cycle, initially aiming to maintain high interest rates and shrink its balance sheet, but the COVID-19 pandemic in 2020 caused the Fed to rapidly double its balance sheet.

2020–2022: The US balance sheet expanded from $4.5 trillion to $9 trillion, with rates falling to zero, leading to a significant depreciation of the dollar and a rising NTD, reaching around 27 to 1 USD.

After 2022: US inflation spiraled out of control, prompting the Fed to rapidly hike interest rates, causing the dollar to rebound, and the exchange rate to fluctuate within a narrower range. It was only after the Fed ended its high-rate cycle and began cutting rates in September 2024 that the rate retreated toward 32.

The significance of psychological levels: Many market participants hold a “trading scale” in mind—30 yuan as a key psychological level. Many believe that USD below 30 is worth buying, above 32 should be sold. This perception has practical reference value in USD trend forecasts.

Strategic considerations in the current environment

The appreciation of the NTD is clear, but risks should not be overlooked. Central bank policy uncertainty, large-scale hedging by financial institutions, and developments in US-Taiwan trade negotiations will directly influence the exchange rate trend. Investors should closely monitor these variables, avoid one-sided bets, and diversify their holdings to manage exchange rate volatility risks.

For long-term investors, Taiwan’s economic fundamentals are stable, semiconductor exports are booming, and the NTD is likely to oscillate within the 30 to 30.5 range, maintaining a relatively strong position over the long term. However, FX positions should be controlled within 5%-10% of total assets, combined with other global asset allocations, to effectively reduce risks.