USD/TWD exchange rate hits a 40-year high! The three main drivers behind the TWD breaking the 30-dollar mark and the future market outlook

The New Taiwan Dollar (NTD) has recently experienced a remarkable surge against the US dollar, with the USD/NTD exchange rate soaring nearly 10% over just two trading days, and the single-day increase reaching a 40-year high. This wave of appreciation has completely reversed the market’s previous panic over depreciation and has sparked lively discussions among investors about the future trend. Is this appreciation a short-term market sentiment reaction, or the beginning of a medium-term upward trend? This article will analyze the driving factors behind the USD/NTD exchange rate and outline clear strategic considerations for investors.

Review: 20 Days of Market Transformation from Crisis to Opportunity

Going back 30 days, the market was still shrouded in pessimism. At that time, the NT dollar faced depreciation pressure, with concerns that the exchange rate might break through 34 or even 35. As a typical export-oriented economy, Taiwan is highly sensitive to exchange rate fluctuations—its net foreign investment accounts for as much as 165% of GDP, and sharp currency swings can significantly impact the economy.

The turning point occurred after U.S. President Trump announced a 90-day delay in implementing reciprocal tariffs. With this policy declaration, market expectations shifted toward a wave of procurement, and Taiwan, as a global hub for semiconductors and electronics manufacturing, saw a clearer export outlook. Meanwhile, the IMF raised Taiwan’s economic growth forecast, and the Taiwan stock market performed strongly, further attracting foreign capital inflows.

On May 2, the NT dollar surged 5% in a single day, closing at 31.064, setting a 15-month high. After the weekend, on May 5, the NT dollar continued to strengthen by 4.92%, with the USD/NTD rate breaking the psychological 30 mark, reaching a high of 29.59 during trading. Such volatility triggered the third-largest trading volume in foreign exchange market history, a rare event.

In comparison, other Asian currencies rose less: Singapore dollar +1.41%, Japanese yen +1.5%, Korean won +3.8%. But the NT dollar’s appreciation was notably more intense, reflecting market optimism about Taiwan’s economic prospects.

In-Depth Analysis: Three Forces Behind the Appreciation

First Force: Policy Expectations and Foreign Capital Inflows

Industry consensus holds that the fundamental driver of this NT dollar appreciation stems from changing policy expectations. The delay in tariffs by the Trump administration has led markets to anticipate short-term benefits for Taiwan’s exports, attracting substantial foreign investment into NT dollar assets. Additionally, upward revisions of economic growth forecasts and strong stock market performance have further enhanced the currency’s attractiveness.

Second Force: The Dilemma Facing the Central Bank

On May 2, the Central Bank issued an emergency clarification, emphasizing that it would not intervene in the foreign exchange market, but did not directly respond to whether Taiwan-U.S. negotiations involved currency clauses. This reflects a deeper dilemma: the Trump administration’s “Fair and Reciprocal Trade Plan” explicitly scrutinizes “currency intervention,” constraining the central bank’s policy space.

Taiwan’s trade surplus in Q1 reached USD 23.57 billion, up 23% year-on-year, with the U.S. surplus soaring 134% to USD 22.09 billion. If the central bank cannot exert strong control as in the past, upward pressure on the NT dollar will inevitably be released. This explains why market expectations of the central bank’s policy have shifted.

Third Force: Hedging Operations by Financial Institutions

UBS research indicates that this abnormal volatility exceeds traditional economic indicator explanations. Beyond market sentiment, large-scale currency hedging by Taiwanese insurers and corporations, along with concentrated unwinding of NT dollar financing arbitrage trades, have collectively amplified the fluctuations.

It is noteworthy that Taiwanese life insurers hold as much as USD 1.7 trillion in overseas assets (mainly U.S. Treasuries), yet have long lacked sufficient currency hedging. The logic was “the central bank could always effectively suppress NT dollar appreciation,” but this assumption has been broken. When the NT dollar retraces, insurers may further increase hedging ratios, and simply restoring FX hedging/deposits to trend levels could trigger USD selling pressure of about USD 1 trillion—equivalent to 14% of Taiwan’s GDP—posing significant risk.

Technical Analysis of USD/NTD Exchange Rate

Valuation Perspective: The NT dollar has shifted from undervaluation to a reasonably high level

The key indicator for assessing fair value is the BIS’s real effective exchange rate index (REER). With a baseline of 100, values above 100 indicate overvaluation, below 100 suggest undervaluation.

As of late March:

• USD index ~113 → significantly overvalued
• NT dollar index ~96 → reasonably undervalued
• Yen index ~73 → severely undervalued
• Won index ~89 → clearly undervalued

This suggests the NT dollar still has some appreciation room, but risks of overvaluation are accumulating.

Historical Benchmark: 28 Yuan Difficult to Break

Looking at the period from the start of the year to now, the NT dollar’s appreciation has been largely in line with regional currencies:

• NT dollar +8.74%
• Yen +8.47%
• Won +7.17%

Although recent gains are rapid, from a long-term perspective, they are not out of order. Most industry insiders believe that the likelihood of the NT dollar reaching 28 per USD is very low.

UBS’s Latest View

UBS’s report synthesizes multiple analyses: first, valuation models show the NT dollar has shifted from moderate undervaluation to a fair value that is 2.7 standard deviations above; second, FX derivatives markets indicate the strongest appreciation expectations in five years; third, similar large single-day increases are often not immediately reversed.

However, UBS expects that when the trade-weighted index of the NT dollar rises another 3% (approaching the central bank’s tolerance limit), authorities may step up interventions to smooth volatility.

A Decade in Review: Understanding Long-Term Patterns of USD/NTD

Over the past decade (October 2014 to October 2024), the NT dollar has fluctuated between 27 and 34 per USD, with an amplitude of about 23%, relatively small compared to global currencies. In contrast, the yen-to-dollar exchange rate has a volatility of up to 50% (from 99 to 161), twice that of the NT dollar.

Historical data reveal an important pattern: the fundamental driver of NT dollar appreciation or depreciation is not the central bank but the Federal Reserve’s monetary policy.

Between 2015 and 2018, amid China’s stock market crash and European debt crisis, the Fed slowed its balance sheet reduction and resumed quantitative easing, strengthening the NT dollar. After 2018, as the Fed began raising interest rates, the COVID-19 pandemic struck suddenly in 2020, prompting the Fed to rapidly expand its balance sheet from USD 4.5 trillion to USD 9 trillion, with rates dropping to zero, and the NT dollar surged to 27. Post-2022, with U.S. inflation spiraling out of control, the Fed started aggressive rate hikes, strengthening the dollar again, pushing the NT dollar back toward 32. It was only after the Fed began cutting rates in September 2024 that the exchange rate showed signs of easing.

Market consensus on the “30 Yuan psychological level”: Most investors see 30 as a key reference point—USD below 1:30 is viewed as a buying opportunity, above 32 as a signal to sell. This reflects a collective judgment on the reasonable exchange rate level.

Investment Strategy Recommendations

For Advanced Traders

For investors experienced in FX trading and with higher risk tolerance, consider:

1. Direct trading of USD/TWD or related currency pairs on FX platforms to capture short-term volatility
2. Using derivatives such as forward contracts to lock in appreciation gains in advance

For Beginners

For those wanting to participate in this opportunity but lacking experience, remember:

• Start with small amounts to test the waters, gradually increase positions
• Avoid impulsive adding; emotional trading often leads to larger losses
• Many platforms offer free demo accounts for strategy testing before real trading

Long-Term Allocation Approach

From a medium- to long-term perspective, considering Taiwan’s solid economic fundamentals and promising semiconductor exports, the NT dollar is likely to oscillate within the 30–30.5 range. Long-term investment suggestions:

• Limit FX exposure to 5%–10% of total assets
• Diversify remaining assets into global stocks and bonds to reduce single-risk exposure
• Use low-leverage trading for USD/TWD, and always set stop-loss orders for protection
• Continuously monitor Taiwan’s central bank actions and U.S.-Taiwan trade developments, as these directly influence exchange rates
• Consider pairing FX holdings with investments in Taiwanese stocks or bonds to hedge overall risk

Low-spread, no-commission FX trading platforms have become popular among retail investors, and small-scale short-term trading of popular currency pairs offers good practice. Regardless of the strategy, discipline and risk management are always the keys to successful trading.