Is the Taiwanese dollar appreciating or depreciating? Analysis of the subsequent trend after the USD/TWD 30 barrier was broken

How the TWD has fluctuated against the USD over the past decade

To understand the significance of the current TWD appreciation, let’s first look at the long-term trend over the past ten years. From October 2014 to October 2024, the USD/TWD exchange rate has fluctuated between 27 and 34, with a volatility of about 23%. This range of fluctuation is relatively stable among global currencies—in comparison, the USD/JPY has a volatility of up to 50% (ranging from 99 to 161), which is twice that of the TWD.

The exchange rate movements over these ten years reflect several key phases: between 2015 and 2018, influenced by Chinese stock market turbulence and the European debt crisis, the Federal Reserve slowed its balance sheet reduction and continued quantitative easing, causing the TWD to strengthen. After 2018, the Fed shifted to a rate hike policy, strengthening the dollar. Following the COVID-19 pandemic outbreak in 2020, the Fed’s balance sheet rapidly expanded from $4.5 trillion to $9 trillion, and interest rates fell to zero, leading to a sharp depreciation of the USD, with the TWD hitting a historic low of 27 to the dollar.

Starting in 2022, U.S. inflation spiraled out of control, prompting the Fed to initiate an aggressive rate hike cycle, causing the dollar to surge again. The USD/TWD exchange rate remained high with narrow fluctuations. It wasn’t until September 2024, after the Fed ended this rate hike cycle and began cutting rates, that the exchange rate gradually fell back to around 32. From this historical perspective, the TWD’s interest rate fluctuations are relatively small, and its appreciation or depreciation is mainly controlled by the Federal Reserve.

What happened in just two trading days to nearly 10% TWD appreciation

Rewinding to May this year. The market’s dramatic turn occurred within just 30 days. A month ago, investors were worried that the TWD might depreciate to 34 or even 35, but the situation suddenly reversed.

On May 2, the TWD appreciated by 5% against the USD in a single day, marking the largest single-day gain in 40 years, closing at 31.064, a 15-month high. After the weekend, on May 5, the TWD continued its rally, rising another 4.92%, and during the day, it broke through the 30 mark, reaching a high of 29.59, shocking the market.

In just two trading days, the TWD appreciated nearly 10%, setting multiple records and triggering the third-largest trading volume in forex history. Notably, from the beginning of the year until early April, before President Trump announced reciprocal tariffs, the TWD was still depreciating by about 1%.

Is this appreciation unique to Taiwan? Not quite. Under the influence of U.S. tariff policies, Asian currencies generally appreciated—Singapore dollar up 1.41%, Japanese yen up 1.5%, Korean won up 3.8%. However, the TWD’s appreciation was significantly beyond these currencies. This abnormal performance forced government officials to intervene to stabilize the market—Taiwan President Lai Ching-te issued a five-point statement, and Central Bank Governor Yang Chin-tung held a press conference to clarify that the central bank did not intervene in the forex market, but market sentiment continued to fluctuate.

Three key factors driving the rapid appreciation of the TWD

Triggered by Trump’s tariff policies

The direct catalyst for the TWD’s appreciation was the Trump administration’s tariff policies. When the U.S. announced a 90-day delay in implementing reciprocal tariffs, two major market expectations emerged: first, a global procurement wave would be triggered, benefiting Taiwan as a key supplier of electronics and semiconductors; second, the International Monetary Fund unexpectedly raised Taiwan’s economic growth forecast, coupled with strong performance of the Taiwan stock market. These factors attracted substantial foreign capital inflows, forming the first wave of upward momentum for the TWD.

The dilemma faced by the central bank

The central bank found itself in a dilemma during this appreciation wave. The official statement on May 2 attributed the exchange rate movement to market expectations of the U.S. demanding currency appreciation from trade partners, but did not directly address whether the U.S.-Taiwan tariff negotiations involved exchange rate clauses.

According to publicly available information, the Trump administration’s “Fair and Reciprocal Trade” plan explicitly emphasizes “currency intervention” as a review focus. This raised concerns that, under the context of U.S.-Taiwan negotiations, the central bank’s room for intervention might be limited. Such concerns are not unfounded—Taiwan’s trade surplus in the first quarter reached $23.57 billion, up 23% year-on-year, with the surplus against the U.S. soaring 134% to $22.09 billion. If the central bank cannot intervene strongly as before, the TWD faces significant upward pressure.

Concentrated hedging operations by financial institutions

According to UBS’s latest research report, the forex surge on May 2 exceeded what traditional economic indicators could explain. The report pointed out that large-scale hedging operations by Taiwanese insurers and exporters, along with concentrated unwinding of TWD financing arbitrage trades, jointly caused this exchange rate movement.

UBS specifically warned that if foreign exchange 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 also noted that Taiwanese life insurers hold up to $1.7 trillion in overseas assets, with long-term insufficient hedging measures. In the past, they relied on the central bank to suppress the TWD’s appreciation, but now the central bank faces the risk of being labeled a “currency manipulator” by the U.S. Department of the Treasury, exposing structural risks.

What is the outlook for USD/TWD in the future

Low probability of breaking the 28 mark

Although the recent rally of the TWD has been fierce, most market participants believe that breaking through the 28 level (i.e., TWD appreciating to 1 USD = 28 TWD) is highly unlikely. The consensus tends to be conservative.

Using BIS real effective exchange rate index to assess fair value

The Bank for International Settlements’ (BIS) real effective exchange rate index(REER) is an important tool for evaluating currency valuation. A value of 100 indicates equilibrium; above 100 suggests possible overvaluation. As of the end of March, data shows:

The USD index was around 113, indicating a significant overvaluation; the TWD index remained around 96, in a reasonably undervalued zone. In comparison, the JPY and KRW indices were even lower, at 73 and 89 respectively, indicating more pronounced undervaluation among major Asian export currencies.

Cross-comparison with other Asian currencies

Extending the observation period from the recent abnormal volatility to the period from early this year to now, the cumulative appreciation of the TWD against the USD is roughly in line with the yen and won: TWD +8.74%, JPY +8.47%, KRW +7.17%. From this perspective, the recent appreciation of the TWD is not an isolated phenomenon but part of a broader Asian currency appreciation trend.

UBS outlook on the future market

UBS’s latest analysis suggests that the TWD will continue to appreciate. Valuation models show the TWD has shifted from moderate undervaluation to a fair value that is 2.7 standard deviations higher; forex derivatives markets show the “strongest appreciation expectation in five years”; historical experience indicates that after similar large single-day gains, immediate retracement is unlikely.

UBS recommends investors avoid premature contrarian bets but expects that when the trade-weighted index of the TWD rises another 3% (approaching the central bank’s tolerance limit), the authorities may increase intervention to stabilize exchange rate fluctuations.

How investors with different risk preferences should respond

Strategies for experienced traders

Experienced forex traders might consider two strategies. One is to directly trade USD/TWD in the spot forex market to capture intraday or short-term volatility; the other is, if holding USD assets, to use derivatives like forward contracts for hedging, locking in profits from TWD appreciation.

Principles for novice investors

Newcomers to forex should remember some key principles. First, start with small amounts to test the waters—avoid impulsively increasing positions just because of rising prices. Second, stay rational—one emotional breakdown can lead to ruin. Many platforms offer demo trading; beginners can use virtual funds to test their strategies before risking real money.

Asset allocation advice for long-term investors

Long-term investors should consider that Taiwan’s economic fundamentals are solid, with a booming semiconductor industry, making the TWD likely to oscillate between 30 and 30.5 in the long run, maintaining relative strength. However, forex positions should not exceed 5%-10% of total assets; remaining funds should be diversified into other global assets to reduce overall risk.

It is recommended to operate USD/TWD with low leverage and set stop-loss points to protect oneself. Additionally, keep a close eye on Taiwan’s central bank policies and U.S.-Taiwan trade developments, as these factors directly influence exchange rates. Combining investments in Taiwanese stocks or bonds can help keep overall portfolio risk within manageable levels despite currency fluctuations.

Conclusion: 30 is the market’s psychological threshold

Based on the past decade of exchange rate history and recent abnormal volatility, the market has formed a “psychological yardstick”—an exchange rate below 30 TWD per USD is viewed as a reasonable entry point for buying USD, while above 32 TWD is a reference for selling. For long-term currency trading, these figures can serve as reference points. Judging whether the TWD will appreciate or depreciate depends on multiple factors, including Fed policy direction, Taiwan’s economic data, central bank stance, and international geopolitical developments. There is no absolute answer, but proper risk management remains key.