New Taiwan Dollar appreciates to 40-year high! TWD exchange rate trend analysis and market outlook

Surprising Exchange Rate Fluctuations: TWD Breaks Records in Just Two Days

The New Taiwan Dollar has recently demonstrated a strong upward trend, with exchange rate fluctuations in early May shocking the market. The USD/TWD pair quickly broke the psychological barrier of 30 in just a few trading days from around 31, with an increase of nearly 10%, setting the largest single-day gain in 40 years. As a result, the foreign exchange market experienced the third-largest trading volume in history, highlighting the high level of market attention.

Compared to other Asian currencies, the appreciation of the TWD has been particularly prominent. During the same period, the SGD rose by 1.41%, the JPY by 1.5%, and the KRW by 3.8%, but the TWD’s appreciation rate clearly surpasses the regional average. What market forces are behind this abnormal phenomenon?

Three Major Drivers Behind the TWD Exchange Rate Movement

Factor 1: Trade Policy Expectations Reshape Market Sentiment

After the US government adjusted tariff policies, market expectations for Taiwan’s export outlook shifted. The announcement to delay the implementation of tariffs by 90 days led investors to anticipate a global procurement surge, benefiting Taiwan as an export-oriented economy. The International Monetary Fund (IMF) also raised Taiwan’s economic growth forecast, coupled with steady performance of the Taiwan stock market, these positive factors continuously attracted foreign capital inflows, becoming the main driving force behind the TWD’s appreciation.

Factor 2: Market Concerns Over Limited Central Bank Policy Space

The central bank faces an unprecedented dilemma. On one hand, Taiwan’s trade surplus reached US$23.57 billion in the first quarter, a 23% increase year-on-year, with the US trade surplus soaring by 134% to US$22.09 billion, exerting significant upward pressure on the TWD. On the other hand, international scrutiny of exchange rate policies is tightening, and the space for the central bank’s past strong market interventions is limited. These policy constraints raise concerns that the central bank may no longer be able to effectively regulate the TWD exchange rate as before.

Factor 3: Financial Institutions’ Hedging Operations Amplify Volatility

UBS research indicates that large-scale hedging operations in the financial sector are a key driver of this abnormal volatility. Taiwan’s insurance industry holds over US$1.7 trillion in overseas assets, mainly US Treasuries, which have long lacked sufficient currency hedging measures. When the market expects the central bank to have limited intervention capacity, these institutions tend to conduct concentrated hedging and closing positions, creating substantial dollar selling pressure and further amplifying the TWD’s appreciation trend.

Reasonable Range for Future TWD Exchange Rate

Valuation Indicators

The BIS (Bank for International Settlements) compiled the Real Effective Exchange Rate (REER) index as an important reference. The index uses 100 as the equilibrium point; values above 100 suggest potential overvaluation, while below 100 indicate undervaluation. As of the end of March, Taiwan’s REER was about 96, indicating a reasonably low valuation, whereas the US dollar index was around 113, showing a clear overvaluation.

This suggests that the TWD has further appreciation potential, but the extent of appreciation should be supported by fundamentals. The REER indices for the JPY and KRW are 73 and 89 respectively, indicating more pronounced undervaluation among major Asian export currencies, implying that the entire region faces upward pressure on exchange rates.

( Practical Assessment of Appreciation Space

Most analysts believe that while the TWD may remain strong in the short term, it is unlikely to reach 28 per US dollar. Since the beginning of the year, the TWD has appreciated by 8.74%, similar to the 8.47% rise of the JPY and 7.17% of the KRW, with no significant outperformance. UBS’s latest report predicts that when the trade-weighted index of the TWD rises by another 3% (approaching the central bank’s tolerance limit), the authorities may increase intervention efforts to stabilize the currency’s sharp fluctuations.

Historical Perspective: A Decade of Exchange Rate Fluctuation Patterns

Over the past decade, the USD/TWD exchange rate has mainly fluctuated between 27 and 34, with a volatility of about 23%, making it a relatively stable currency compared to others globally. In contrast, the JPY/USD has experienced a 50% fluctuation (from 99 to 161), demonstrating greater stability of the TWD.

The long-term drivers of the TWD exchange rate are primarily linked to changes in US Federal Reserve policies rather than central bank interventions. Between 2015 and 2018, the Fed eased quantitative tightening, strengthening the TWD; after 2018, US rate hikes led to a stronger dollar; during the COVID-19 pandemic, the Fed’s balance sheet expanded from US$4.5 trillion to US$9 trillion, causing the TWD to appreciate to 27; after 2022, aggressive US rate hikes to combat inflation further strengthened the dollar, prompting adjustments in the TWD exchange rate accordingly.

Investment Insights from TWD Exchange Rate Trends

) Trading Considerations

For experienced investors, short-term trading of USD/TWD and related currency pairs offers opportunities for profit from volatility. Using derivatives such as forward contracts to lock in appreciation gains is also a common practice in mature portfolios.

Beginner investors interested in participating should follow basic risk management principles: start with small amounts to test the market, avoid impulsive increases, set clear stop-loss points to protect capital, and verify strategies through simulated trading.

( Long-term Allocation Recommendations

Taiwan’s economic fundamentals remain solid, with semiconductor exports continuing to improve. The TWD is likely to oscillate within the 30 to 30.5 range over the long term, maintaining a relatively strong stance. However, foreign exchange positions should not exceed 5%-10% of total assets, and diversification with other global assets is recommended to spread risk.

There is a common “psychological threshold” in the market—many investors believe that the TWD below 30 per US dollar has purchasing value, while rates above 32 are suitable for selling. This range can serve as a reference for long-term currency investment.

) Importance of Policy Monitoring

The future development of the TWD exchange rate still requires close attention to central bank actions and US-Taiwan trade negotiations. These policy factors will directly influence the magnitude and direction of currency fluctuations. Investors should regularly update market intelligence and adjust their positions accordingly.