New Taiwan Dollar breaks the 30-dollar psychological threshold! A comprehensive analysis of future exchange rate trends and investment strategies

The New Taiwan Dollar reversed its decline within just two trading days, showcasing a rare and intense appreciation trend not seen in 30 years. Between May 2 and May 5, the NT$ against the US dollar appreciated by nearly 10% cumulatively, with a single-day increase of up to 5%, setting a 40-year record for the largest single-day gain. What economic signals does this abnormal volatility reflect? How should investors respond?

The Triple Drivers Behind the Rapid Appreciation of the NT$

Tariff policies drove the initial wave of buying

After U.S. President Trump announced a 90-day delay in implementing reciprocal tariffs, the market anticipated a wave of centralized procurement by global companies, benefiting Taiwan as a major export nation. Meanwhile, the International Monetary Fund unexpectedly raised Taiwan’s economic growth forecast. These positive news items attracted substantial foreign investment, becoming the main momentum pushing the NT$ higher.

Statistics show that Taiwan’s trade surplus in the first quarter reached US$23.57 billion, a 23% increase from the same period last year, with the trade surplus with the U.S. soaring by 134% to US$22.09 billion. Strong export momentum and optimistic economic prospects provided a solid foundation for the NT$’s appreciation.

The central bank faces policy dilemmas

The rapid appreciation of the NT$ has also impacted Taiwan’s central bank’s policy space. The Trump administration’s “Fair and Reciprocal Trade” plan explicitly listed “currency intervention” as a focus of review, putting the central bank in a dilemma between stabilizing the currency market and avoiding being labeled a currency manipulator.

Historically, Taiwan’s central bank has relied on market interventions to curb excessive NT$ appreciation, but under the context of U.S.-Taiwan trade negotiations, the scope for such measures has been significantly constrained. Although Governor Yang Jinlong publicly clarified that the central bank has not intervened in the currency market, market concerns about policy space remain.

Financial institutions’ hedging operations amplify volatility

A research report from UBS indicates that Taiwanese life insurers hold overseas assets totaling US$1.7 trillion but lack sufficient currency hedging measures. As expectations of limited intervention capacity grew, insurers accelerated “panic” hedging operations, while concentrated unwinding of NT$ financing arbitrage trades also contributed to the abnormal exchange rate fluctuations.

UBS warns that if foreign exchange hedging scales revert to long-term trend levels, it could trigger about US$100 billion in dollar selling pressure, equivalent to 14% of Taiwan’s GDP. This potential risk should not be underestimated.

Exchange Rate Rationality Assessment: Insights from the Real Effective Exchange Rate Index

The BIS( compiled Real Effective Exchange Rate (REER) index provides an important reference. The index uses 100 as a baseline; values above 100 suggest possible overvaluation, while below 100 indicate undervaluation risks.

As of the latest data at the end of March:

• The US dollar index is approximately 113, indicating a significantly overvalued state
• The NT$ index is about 96, in a reasonably undervalued state

In comparison, the yen and Korean won indices are only 73 and 89 respectively, highlighting more pronounced undervaluation among major Asian export currencies. This suggests the NT$ still has room for further appreciation, but the appreciation should remain within a reasonable range.

Future Outlook for the NT$

Limited likelihood of reaching 28 NT$/USD

Although the market generally expects the Trump administration to continue pressuring the NT$ to appreciate, most industry insiders believe that the possibility of the NT$ reaching 28 per US dollar is very low. The realistic appreciation potential is relatively limited.

Appreciation since the beginning of the year aligns with regional currencies

Extending the observation period from recent abnormal fluctuations to year-to-date, the appreciation of the NT$ is roughly in line with other Asian currencies:

• NT$ up 8.74%
• Yen up 8.47%
• Won up 7.17%

From a longer-term perspective, the NT$’s trend has been synchronized with regional currencies, and the recent sharp fluctuations are mainly short-term market sentiment reactions.

UBS expects the appreciation trend to continue

UBS’s multi-faceted analysis indicates room for further NT$ appreciation. First, valuation models show the NT$ has shifted from moderate undervaluation to a level 2.7 standard deviations above fair value; second, the FX derivatives market reflects the “strongest appreciation expectation in five years”; third, historical experience suggests that large single-day gains are unlikely to be immediately reversed.

UBS advises investors not to prematurely adopt contrarian positions, but notes that when the trade-weighted index of the NT$ rises another 3% (approaching the central bank’s tolerance limit), authorities may increase intervention efforts to smooth volatility.

A Decade of Exchange Rate Review: Long-term Trends

Reviewing the past decade’s exchange rate performance, USD/NT$ has generally fluctuated between 27 and 34, with an overall volatility of about 23%, relatively moderate compared to major global currencies. For instance, the yen’s USD volatility reaches 50%, highlighting the NT$’s relative stability.

Historically, the ten-year average USD/NT$ rate hovers around 30. This level has gradually become a “psychological equilibrium point” for market participants. Since the Fed began tapering quantitative easing in 2013, the USD/NT$ has risen from lows to around 33; during the COVID-19 pandemic in 2020, the Fed’s large-scale asset purchases and rate cuts caused the NT$ to appreciate to 27; after 2022, with the Fed’s rapid rate hikes, the exchange rate oscillated around 32 until September 2024, when the Fed started cutting rates, bringing it back to around 32.

The main determinant of NT$ fluctuations remains the Fed’s policy cycle, rather than Taiwan’s central bank. The NT$’s small interest rate movements mainly reflect shifts in U.S. monetary policy.

Investment Strategies and Risk Management Recommendations

Advanced forex trading strategies

Experienced traders can engage in short-term USD/TWD trading via the spot forex market to capitalize on daily or weekly volatility; or use derivatives like forward contracts for hedging, locking in gains from appreciation.

Key principles for beginners

Newcomers aiming to participate in recent volatility should follow these principles: first, start with small capital to test the waters; never add excessively; second, set clear stop-loss levels to protect principal; third, repeatedly test trading strategies on demo accounts to ensure feasibility.

Long-term portfolio allocation

Taiwan’s economic fundamentals remain solid, with sustained semiconductor exports. Over the long term, the NT$ may stay relatively strong within the 30 to 30.5 range. Investors should limit foreign exchange positions to 5%-10% of total assets, diversifying remaining funds into global stocks, bonds, and other assets to reduce risks from single-currency fluctuations.

When trading USD/TWD, adopt low leverage and closely monitor Taiwan’s central bank actions and U.S.-Taiwan trade negotiations, as these will directly influence the exchange rate. Avoid concentrated bets on a single asset class, maintain a diversified portfolio, and even amid significant currency fluctuations, overall returns can remain stable.