Recently, someone asked me what the U.S. interest rate hike really means for Taiwanese investors. To be honest, this question is much more complex than it appears on the surface.

Looking back over the past few years, the Federal Reserve’s rate hike cycle was indeed rapid and aggressive. Starting in early 2022, they continuously raised rates significantly, increasing over 500 basis points in a short period, bringing interest rates from near zero to over 5%. Why so urgent? Mainly because inflation was out of control, reaching a 40-year high at the time. This all sounds distant, but the impact on our wallets in Taiwan is very direct.

The most immediate result of U.S. rate hikes is the appreciation of the U.S. dollar. This seems simple, but the chain reactions behind it are complex. When the dollar appreciates, the Taiwanese dollar depreciates, meaning we get fewer U.S. dollars for our NT dollars. Worse, Taiwan’s imports are priced in U.S. dollars, especially agricultural products—America is Taiwan’s largest supplier of agricultural goods, accounting for over 20%. The dollar’s appreciation directly raises import costs, leading to inflation. You might remember that in 2022, egg prices rose by 26%, and behind that was the rising cost of imported feed.

Taiwan’s central bank also raised interest rates, but not as aggressively as the Federal Reserve. It’s like rowing against the current; no matter how hard you paddle, you can’t stop the NT dollar from depreciating. Another serious consequence of the NT dollar’s depreciation is capital outflow. Imagine you’re a foreign investor, exchanging dollars for NT dollars to buy Taiwanese stocks, but the NT dollar depreciates by 11%. Your gains instantly turn into losses, so you sell stocks to convert back to dollars for risk hedging. When everyone starts selling, the Taiwanese stock market begins to fluctuate.

Regarding Taiwan’s stock market, the impact of U.S. rate hikes is indeed significant. Data shows that in 2022, Taiwan experienced over $40 billion in capital outflows, ranking first in Asia, and the weighted index dropped by 21%. But this doesn’t mean Taiwan’s stock market has no opportunities. On the contrary, financial stocks performed well in the rate hike environment because the interest margin widened, increasing bank profits. Banks like Taiwan Cooperative Bank saw interest income grow over 30% year-over-year, and their stock prices also rose considerably.

As an ordinary investor, my advice is as follows. First, since U.S. rate hikes boost the dollar, investing in USD is the most direct choice. For small-scale investors, consider using Contracts for Difference (CFDs) to participate, as they offer high leverage and low entry barriers. Second, adjust your stock holdings by reducing overvalued stocks and increasing financial stocks or high-dividend-yield stocks. Third, if you want to hedge further, consider shorting the Nasdaq index, because Taiwan’s stock market is highly positively correlated with Nasdaq.

Looking back now, the U.S. rate hike cycle has already passed. But the end of a rate hike cycle often sees reversals, which is an important pattern to remember. For Taiwanese investors, the key is to understand the chain reactions of U.S. rate hikes and to adjust strategies in advance, so you can seize opportunities amid market volatility.