The truth behind the New Taiwan Dollar breaking the 30 mark: Central bank dilemma, financial manipulation, and the Trump effect

The New Taiwan dollar has recently made a shocking move! In just two trading days, it skyrocketed nearly 10%, depreciating from 34 yuan to panic and then rallying to 29.59 yuan, setting multiple historical records. This exchange rate fluctuation not only stands out among Asian currencies but also triggered the third-largest trading volume in the history of the foreign exchange market. But is this truly a long-term trend or just a fleeting speculative feast?

Trump’s Tariff Policies Ignite the Fire for TWD Appreciation

To understand why the New Taiwan dollar suddenly surged, we need to start with U.S. President Trump’s policies. When Trump announced the postponement of implementing reciprocal tariffs for 90 days, market expectations dramatically shifted.

Global anticipation of a procurement surge emerged, and Taiwan, as a major exporter of electronics and semiconductors, is expected to see a short-term increase in export orders. Meanwhile, the IMF unexpectedly raised Taiwan’s economic growth forecast, and the Taiwan stock market performed remarkably well. These positive news flows led to a frenzy of foreign capital inflows, becoming the primary driver pushing the USD against the TWD downward.

However, the key issue is that Trump’s government’s “Fair and Reciprocal Plan” explicitly listed “currency intervention” as a focus of review. This means Taiwan’s central bank’s past aggressive interventions to stabilize the TWD might now face accusations of “currency manipulation” from the U.S. Department of the Treasury.

Central Bank Faces Dilemma: Policy Space Being Squeezed

On May 2nd, when the TWD appreciated by 5% in a single day—the largest single-day gain in 40 years—the central bank’s emergency statement revealed their predicament. They attributed the appreciation to “market expectations that the U.S. might request trading partners to appreciate their currencies,” but avoided addressing the most pressing concern: “whether US-Taiwan negotiations involve currency clauses.”

Behind this ambiguity lies the real dilemma of Taiwan’s central bank. In Q1, Taiwan’s trade surplus reached $23.57 billion, up 23% year-on-year, with the US trade surplus soaring 134% to $22.09 billion. If the central bank loses its intervention capability, the appreciation pressure on the TWD could become unmanageable. Although Governor Yang Jinlong has repeatedly clarified that they are not under U.S. pressure, market anxiety remains unresolved.

Financial Institutions’ “Panic Operations” Amplify Volatility

UBS’s latest research report uncovers the invisible drivers behind this exchange rate movement. The report states that a 5% single-day surge far exceeds what traditional economic indicators can explain. The real culprits are large-scale hedging operations by Taiwanese insurers and exporters, coupled with concentrated unwinding of TWD financing arbitrage trades.

Even more startling, an exclusive report by the Financial Times on the 3rd directly points to “panic” operations by Taiwanese life insurers. Taiwan’s life insurance industry holds up to $1.7 trillion in overseas assets (mainly U.S. Treasuries), yet has long lacked sufficient currency hedging. Their past willingness to expose themselves to currency risk was based on the belief that “Taiwan’s central bank can always effectively suppress significant TWD appreciation.” Now, with the central bank in a dilemma, insurers are forced to rapidly add hedging positions, which in turn exacerbates short-term USD/TWD volatility.

UBS warns that restoring foreign exchange hedging/deposits to trend levels could trigger about $100 billion in USD selling pressure (equivalent to 14% of Taiwan’s GDP). This hidden risk warrants close attention.

Future USD/TWD Trend: Limited Room for Appreciation

Will the TWD continue to rise? The likelihood of reaching 28 yuan is very slim. To assess the exchange rate’s reasonableness, one should look at the real effective exchange rate index (REER) compiled by the Bank for International Settlements (BIS).

As of the end of March, the USD index was around 113, indicating a significant “overvaluation,” while the TWD index remained around 96, suggesting a “reasonably undervalued” status. In comparison, the JPY and KRW indices are only 73 and 89, respectively, highlighting more pronounced undervaluation among major Asian export currencies.

Extending the observation period from the recent abnormal volatility to the period from the beginning of the year to now, the cumulative appreciation of the TWD against the USD is 8.74%, similar to the 8.47% of the Yen and 7.17% of the Korean Won. This indicates that although the recent TWD rally has been fierce, over a longer horizon, its performance remains in sync with regional trends.

UBS’s latest report suggests that while the TWD’s short-term surge is impressive, valuation models, FX derivatives markets, and historical experience point to continued appreciation. First, valuation models show the TWD has shifted from moderate undervaluation to a fair value that is 2.7 standard deviations higher; second, FX derivatives markets show the “strongest appreciation expectations in five years”; third, similar large single-day jumps often do not immediately reverse.

However, UBS also advises investors not to prematurely take contrarian positions. But they expect that when the trade-weighted index of the TWD rises another 3% (approaching the central bank’s tolerance limit), the authorities may step up intervention.

A Decade of Exchange Rate Review: TWD Volatility Much Smaller Than Yen

To understand the relative position of the TWD, we need to look at a longer timeline. Over the past decade (October 2014 to October 2024), the USD/TWD exchange rate has fluctuated between 27 and 34, with a total volatility of 23%, relatively mild compared to global currencies.

In contrast, the JPY/USD exchange rate has ranged from 99 to 161, with a volatility of 50%, twice that of the TWD. This reflects the TWD’s characteristic as a “relatively stable” regional currency.

The fluctuations of the TWD are mainly driven by Fed policies, not Taiwan’s central bank. During 2015–2018, amid China stock crashes and European debt crises, the Fed slowed QT and continued QE, strengthening the TWD. After 2018, as the Fed raised interest rates, the TWD depreciated. During the COVID-19 pandemic in 2020, the Fed’s balance sheet expanded from $4.5 trillion to nearly $9 trillion, with rates falling to zero, causing the USD to weaken and the TWD to surge to 27 yuan.

Post-2022, due to runaway U.S. inflation, the Fed began rapid rate hikes, sharply appreciating the dollar, pushing USD/TWD into high ranges. In September 2024, as the Fed ended its high-interest cycle and started cutting rates, the exchange rate retreated from high levels.

Looking at the ten-year trend, the market has formed a “measure in most people’s minds”: USD below 30 is attractive, above 32 should prompt profit-taking. For long-term FX investments, this can serve as a reference range.

How Should Investors Respond to This Wave?

For experienced forex traders, they can directly operate short-term trades on USD/TWD via forex platforms, capturing daily or even intraday volatility opportunities. If holding USD assets, they can also use derivatives like forward contracts to lock in appreciation gains.

For novice investors, participating in recent exchange rate fluctuations requires caution: start with small capital, avoid impulsive increases, or risk losing control and exiting. Many forex platforms offer small-scale short-term trading of popular currency pairs, suitable for practicing strategies.

Long-term investment strategies: Taiwan’s economic fundamentals remain solid, with booming semiconductor exports. The TWD may oscillate between 30 and 30.5, maintaining a relatively strong position long-term. But remember to keep FX positions within 5%-10% of total assets, and diversify remaining funds into other global assets to reduce risk.

For stable profits, it’s recommended to use low leverage when trading USD/TWD, and always set stop-loss points to protect capital. Keep a close eye on Taiwan’s central bank actions and U.S.-Taiwan trade developments, as these directly influence exchange rates. Also, avoid concentrating all funds in a single asset; diversify with stocks or bonds to keep overall portfolio risk manageable.