New Taiwan Dollar surges to a bottom: How will the USD/TWD exchange rate evolve? 2025 trend analysis and interpretation

The New Taiwan Dollar has experienced rare intense fluctuations in the short term. What are the underlying reasons behind this wave of exchange rate changes? Looking at historical data, the USD/TWD exchange rate has oscillated between 27 and 34 over the past decade, with a volatility of about 23%, which is relatively stable among global currencies. However, the recent rapid surge has attracted widespread market attention. Is this a short-term fluctuation or a mid-term trend shift?

Ten-Year Exchange Rate Trajectory: Understanding the Fundamentals of TWD Movement

Over the past ten years (October 2014 to October 2024), the USD/TWD volatility has been relatively moderate, contrasting sharply with the 50% volatility of the Japanese Yen. The exchange rate trend has been mainly driven by U.S. Federal Reserve (FED) policies rather than unilateral decisions by Taiwan’s central bank.

From 2015 to 2018, under the influence of the European debt crisis and Chinese stock market volatility, the U.S. delayed balance sheet reduction and maintained an accommodative policy, leading to a strengthening of the TWD. After 2018, the U.S. entered a rate hike cycle, but following the pandemic outbreak in 2020, the FED’s balance sheet expanded from $4.5 trillion to $9 trillion in a short period, and interest rates were cut to zero, causing the USD to depreciate and the TWD to reach a historic high of 27 yuan.

Starting in 2022, due to runaway U.S. inflation, the FED began aggressive rate hikes, strengthening the USD, and the exchange rate rebounded to the 32-33 range. It was only until September 2024, when the FED initiated a rate cut cycle, that the exchange rate adjusted again. This history indicates that the future trend of the USD largely depends on U.S. monetary policy directions.

Recent Anomalies: A Confluence of Multiple Factors Triggering a Currency Storm

Policy Expectation Shift as a Trigger Point

During the period of U.S. trade policy adjustments, market expectations that Taiwan, as an export-oriented economy, would benefit from global procurement shifts drove capital inflows. Simultaneously, the International Monetary Fund (IMF) raised Taiwan’s economic growth forecast, and the Taiwan stock market performed steadily, further boosting market confidence. Within just a few days, the TWD appreciated by over 10%, setting a 40-year single-day record for the largest gain.

Constraints on Central Bank Policy Space

The central bank faces a complex policy dilemma. On one hand, Taiwan’s trade surplus reached $23.57 billion in the first quarter, up 23% year-on-year, with the U.S. trade surplus surging 134% to $22.09 billion, exerting significant upward pressure on the TWD. On the other hand, excessive intervention in the forex market could be accused of currency manipulation, which is unfavorable during sensitive U.S.-Taiwan trade negotiations.

Chain Reaction in Financial Institutions

UBS research indicates that Taiwan’s life insurance industry holds about $1.7 trillion in overseas assets (mainly U.S. Treasuries), yet has long lacked sufficient hedging measures. This stems from the traditional approach of the central bank effectively suppressing the TWD’s sharp appreciation. When this expectation is broken, concentrated hedging by insurers and exporters can amplify the effect. The report warns that restoring foreign exchange hedging to trend levels could trigger about $100 billion in USD selling pressure, equivalent to 14% of Taiwan’s GDP.

Key Indicators for USD Future Trends

Valuation Reference Framework

The Bank for International Settlements (BIS) compiled the real effective exchange rate (REER) index, with 100 as the equilibrium value. As of the end of March, the USD index was about 113, indicating overvaluation; the TWD index remained around 96, within a reasonable undervalued range. This suggests the TWD still has room to appreciate, but gains should be limited.

Comparative Perspective on Regional Currencies

Since the beginning of the year, the TWD has appreciated by 8.74%, the Yen by 8.47%, and the Korean Won by 7.17%, with all three moving roughly in sync. Although the TWD has recently surged rapidly, its overall annual performance shows no significant difference from other major Asian currencies.

Signals from Derivatives Markets

Foreign exchange derivatives markets indicate the “strongest appreciation expectation in five years.” Valuation models show the TWD has shifted from moderate undervaluation to a fair value that is 2.7 standard deviations higher. This suggests that in the short term, the TWD may continue to face upward pressure.

Market Outlook and Trading Considerations

Most market participants believe that it is unlikely for the TWD to reach 28 per USD. When the trade-weighted index of the TWD rises by about 3% (approaching the central bank’s tolerance limit), official intervention may increase to stabilize volatility.

For different investors:

Short-term traders can leverage the volatility of USD/TWD for trading, but should strictly control position sizes and set stop-loss points to manage risks. While short-term fluctuations offer opportunities, they also amplify risks.

Long-term investors should recognize that Taiwan’s economic fundamentals remain solid, with robust semiconductor exports. The TWD may oscillate between 30 and 30.5 in the long run. It is advisable to keep foreign exchange positions within 5%-10% of total assets and diversify with Taiwan stocks, bonds, and other global assets.

Risk management hinges on closely monitoring the central bank’s actions and developments in U.S.-Taiwan trade negotiations, as these factors will directly influence the exchange rate. Using forward contracts and other derivatives for hedging can help protect against downside risks while locking in potential gains from appreciation.

Core Principles for Investment Strategies

The market’s “psychological level” is around 1:30. Most traders see USD below 30 as attractive, while above 32, they consider reducing holdings. These levels can serve as references for long-term currency investment.

Regardless of the strategy, the key is to avoid excessive leverage. Many forex platforms offer demo trading; beginners should test their strategies in virtual environments before entering real markets once they have sufficient understanding.

The future trend of the USD ultimately depends on U.S. monetary policy, the progress of U.S.-Taiwan trade negotiations, and the evolution of the global economy. Investors should develop operational plans aligned with their risk tolerance based on a thorough understanding of these risks.