Lately, I've been thinking about the impact of U.S. interest rate hikes on the Taiwanese dollar because it really affects each of our wallets.

Looking back at the rate hike cycle that started in 2022, the Federal Reserve was both fast and aggressive. In just over a year, interest rates jumped from near zero to over 5%, aiming to control the highest inflation in 40 years at that time. Taiwan's central bank was forced to follow suit, raising rates five times, but the magnitude was far less than the U.S. The result was the Taiwanese dollar depreciating steadily, with the impact of U.S. rate hikes directly reflected in the exchange rate.

The chain reaction caused by the depreciation of the Taiwanese dollar is quite serious. The most direct effect is the rise in import prices. In 2022, Taiwan’s food CPI increased by 6%, with eggs soaring by 26%. Think about it—feed corn and sorghum rely on imports, and the U.S. is our largest agricultural product supplier, accounting for over 20% of imports. As the dollar appreciates, import costs go up, and inflation naturally becomes harder to control.

What’s more troublesome is capital outflow. I often see foreign investors’ logic: exchanging dollars for Taiwanese dollars to buy Taiwanese stocks, only to see the Taiwanese dollar depreciate by 11%, wiping out a year’s gains with exchange losses. Unable to do anything, everyone starts selling stocks to buy dollars for hedging, which causes stock market volatility. In 2022, Taiwan’s stock market experienced capital outflows of $41.6 billion, ranking first in Asia, with the weighted index dropping 21%.

Is there any opportunity? Actually, yes. During rate hike cycles, financial stocks tend to perform very well. Banks benefit from wider interest spreads, leading to significant profit growth. For example, Taiwan Cooperative Bank’s interest income grew by 38% in 2022, and its stock price also rose accordingly. Additionally, the impact of U.S. dollar rate hikes on the Taiwanese dollar means that investing directly in USD can yield good returns.

To hedge risks, I suggest adjusting your stock portfolio by reducing overvalued stocks and increasing financial stocks and high-dividend-yield assets. You might also consider shorting the Nasdaq index to hedge against a decline in the Taiwan stock market, as Taiwan stocks and U.S. stocks are highly correlated.

Ultimately, U.S. interest rate hikes are a double-edged sword for the Taiwanese dollar. Depreciation indeed brings inflation and capital outflow pressures, but it also creates opportunities for savvy investors. The key is to understand the rhythm of the rate hike cycle, as reversals often occur in the late stages. Timing the moves well is the most important thing.