New Taiwan Dollar exchange rate surges past the psychological barrier of 30! What is the 2023 US dollar trend forecast and how will the New Taiwan Dollar evolve in the future?

Three Layers of Drivers Behind Exchange Rate Fluctuations: From Tariff Policies to Structural Risks

The New Taiwan Dollar has recently experienced unprecedented volatility not seen in decades, reflecting not only a shift in market sentiment but also revealing Taiwan’s high sensitivity to foreign exchange fluctuations. In just two trading days, the NT$ appreciated nearly 10%, setting a 40-year record for single-day gains, breaking through the 30 NT$ mark to 29.59 NT$, and triggering the third-largest trading volume in foreign exchange market history.

Where does this surge come from? The market generally attributes it to adjustments in the Trump administration’s tariff policies. When the U.S. announced a 90-day delay in implementing reciprocal tariffs, market expectations immediately shifted toward a global procurement wave, with Taiwan, as a major export nation, expected to benefit in the short term. Meanwhile, the IMF raised Taiwan’s economic growth forecast, and the Taiwan stock market performed strongly. These positive news flows attracted a frenzy of foreign capital inflows, becoming the main driving force behind the NT$ appreciation.

However, the role of the central bank has become particularly delicate. The Trump administration’s “Fair and Reciprocal Trade Plan” explicitly listed “intervention in the exchange rate” as a review focus, raising concerns that Taiwan’s central bank may find it more difficult to intervene effectively in the FX market as it has in the past. Taiwan’s trade surplus in the first quarter reached US$23.57 billion, up 23% year-over-year, with the U.S. surplus soaring 134% to US$22.09 billion. Under limited policy space for the central bank, the NT$ indeed faces significant upward pressure.

Even more noteworthy is that risk-hedging operations by financial institutions have amplified volatility. Taiwan’s life insurance industry holds overseas assets totaling up to US$1.7 trillion but has long lacked sufficient FX hedging measures. When policy uncertainty increases, these institutions tend to increase hedging activities collectively, leading to a surge in dollar selling pressure. UBS research indicates that restoring FX hedging to trend levels could trigger about US$100 billion in dollar selling pressure, equivalent to 14% of Taiwan’s GDP.

Valuation Indicators: Quantitative Analysis of NT$ Appreciation Potential

To assess whether the NT$ appreciation is excessive, the key is to observe the Bank for International Settlements (BIS) compiled real effective exchange rate (REER) index. As of the end of March, Taiwan’s NT$ REER index remained around 96, indicating a “reasonably undervalued” state. In comparison, the US dollar index is approximately 113, showing a clear overvaluation, while the yen and Korean won indices are only 73 and 89, respectively, highlighting more significant undervaluation of major Asian export currencies.

Extending the observation period from recent abnormal fluctuations to the overall annual performance, the cumulative appreciation of the NT$ against the US dollar aligns with regional currencies: NT$ +8.74%, Japanese Yen +8.47%, Korean Won +7.17%. This suggests that although the NT$ has appreciated rapidly recently, its longer-term trend remains coordinated with regional currency movements.

UBS’s latest report offers further valuation clues. First, valuation models show the NT$ has shifted from moderate undervaluation to a fair value that is 2.7 standard deviations higher; second, FX derivatives markets indicate the “strongest appreciation expectation in five years”; third, historical experience suggests that after similar large single-day gains, immediate reversals are unlikely. UBS expects that when the trade-weighted index of the NT$ rises another 3% (approaching the central bank’s tolerance limit), official intervention may intensify.

Outlook for the NT$ in 2023 from the Perspective of the US Dollar Trend

Looking at a longer timeframe, the USD/NT$ exchange rate has fluctuated between 27 and 34 over the past decade (October 2014 to October 2024), with only a 23% volatility, indicating relatively low volatility compared to global currencies. In contrast, the Japanese Yen’s fluctuation reaches 50%, twice that of the NT$.

Historical data reveal the true drivers of the NT$ exchange rate: the Fed’s interest rate hike and cut cycles, rather than Taiwan’s central bank policies. During the Chinese stock market crash and European debt crisis from 2015 to 2018, the Fed slowed its quantitative tightening and resumed quantitative easing, leading to a strengthening of the NT$. After 2018, US rate hikes stalled the NT$’s appreciation. Following the COVID-19 outbreak in 2020, the Fed expanded its balance sheet from US$4.5 trillion to US$9 trillion, with rates dropping to zero, causing the dollar to weaken and the NT$ to surge to 27 per USD. Post-2022, US inflation spiraled out of control, prompting the Fed to rapidly hike rates, the dollar rebounded, and the exchange rate returned to around 32. Only after the Fed began cutting rates again in September 2024 did the exchange rate retreat.

Since the 2008 financial crisis, the Federal Reserve has launched three rounds of quantitative easing, reducing its scale in December 2013. US market interest rates rose, capital flowed back to the US from emerging markets, and the USD/NT$ exchange rate continued rising from its 2013 lows to around 33.

Market Consensus and Investment Reference Standards

There exists an “invisible pricing scale” in the market: below 30 USD/NT$, it is considered a reasonable buy point; above 32, a reasonable sell point. This reflects the market’s collective understanding of Taiwan’s long-term equilibrium exchange rate.

Different strategies are needed for different investors. Experienced FX traders can engage in short-term volatility trading on USD/TWD and related currency pairs; those holding USD assets can use derivatives like forward contracts to lock in appreciation gains.

For new investors, participating in FX fluctuations requires caution. The primary principle is to start small, avoid impulsive leverage increases, as excessive leverage can lead to rapid losses. For long-term investments, FX positions should be controlled within 5%-10% of total assets, combined with stocks or bonds to diversify risk. When using low leverage on USD/TWD, stop-loss points must be set for risk management, and close attention should be paid to central bank actions and US-Taiwan trade developments, as these factors will directly influence future exchange rate movements.

Taiwan’s economic fundamentals remain solid, with robust semiconductor exports. The NT$ is expected to fluctuate within the 30 to 30.5 range, maintaining a relatively strong long-term position. However, investors should avoid over-concentration in a single asset and diversify across multiple assets to effectively control overall portfolio risk.