Will the US dollar continue to fall? An in-depth analysis of the exchange rate trend after the New Taiwan dollar breaks through the 30 yuan mark

New Taiwan Dollar Surges: Nearly 10% Increase in Just Two Days

The New Taiwan Dollar recently broke through the psychological 30 yuan mark, delivering an astonishing market performance. According to the latest data, on May 2nd, the TWD appreciated by 5% against the USD in a single day, marking the largest single-day gain in 40 years, with a closing price of 31.064 yuan, rewriting a 15-month high. Subsequently, on May 5th, it continued to rise by 4.92%, with intraday trading even breaking the important 30 yuan level, reaching a high of 29.59 yuan.

In just two trading days, the TWD has surged nearly 10%, not only setting multiple historical records but also triggering the third-largest increase in foreign exchange market trading volume in history. In contrast, from the beginning of the year to early April, the USD against the TWD remained on an upward trend, with the TWD depreciating about 1%.

Compared to other Asian currencies during the same period, the Singapore dollar rose by 1.41%, the Japanese yen by 1.5%, and the Korean won by 3.8%. However, the extent of TWD appreciation is particularly prominent. As an export-oriented economy, Taiwan’s net foreign investment accounts for as much as 165% of GDP, making the TWD especially sensitive to exchange rate fluctuations.

Three Driving Forces Behind the TWD Appreciation

Trump’s Tariff Policies Ignite the Fuse

The US government announced a 90-day delay in implementing reciprocal tariffs, immediately creating two core market expectations: a global procurement wave will be triggered, and Taiwan, as a key part of the supply chain, is expected to benefit in the short term; at the same time, the IMF unexpectedly raised Taiwan’s economic growth forecast, coupled with recent strong performance of the Taiwan stock market. These positive news have attracted significant foreign capital inflows, becoming the initial momentum driving the TWD appreciation.

Limited Policy Space for the Central Bank

On May 2nd, the Central Bank issued an emergency statement but did not directly address the most pressing market concern. The bank attributed the exchange rate volatility to “market expectations that US may request trading partners to appreciate their currencies,” but did not explicitly comment on whether US-Taiwan negotiations involve exchange rate clauses.

It is noteworthy that the US government’s “Fair and Reciprocal Trade Plan” explicitly emphasizes “currency intervention” as a key review point. Against this international backdrop, the Central Bank’s past strong interventions in the forex market are constrained. Taiwan’s trade surplus in the first quarter reached $23.57 billion, up 23% year-on-year, with the US trade surplus soaring by 134% to $22.09 billion. If the Central Bank finds it difficult to intervene forcefully as before, the TWD will inevitably face substantial upward pressure.

Large-Scale Hedging Operations by Financial Institutions

UBS’s latest research indicates that the abnormal single-day 5% fluctuation of the TWD on May 2nd has exceeded traditional economic indicator explanations. The report analyzes that large-scale foreign exchange hedging operations by Taiwanese insurers and export companies, along with concentrated closing of TWD financing arbitrage trades, jointly caused this exchange rate movement.

UBS specifically warns that when the TWD retraces, insurers and exporters may further increase their hedging ratios. Simply restoring foreign exchange hedging/deposits to trend levels could trigger about $100 billion USD in dollar selling pressure, equivalent to 14% of Taiwan’s GDP, representing a significant potential risk.

Future Outlook of USD/TWD: Multi-Dimensional Assessment

Appreciation Potential Has Limits

The market generally believes that the US government will pressure the TWD to appreciate further, but most industry insiders judge that it is highly unlikely for the TWD to reach 28 per USD. This mainly stems from the exchange rate’s own balancing mechanism.

Valuation Indicators Show Reasonableness

An important indicator for assessing exchange rate fairness is the BIS(Bank for International Settlements) compiled real effective exchange rate index(REER), with 100 as the equilibrium value. As of the end of March:

• The US dollar index was about 113, indicating a significant overvaluation
• The TWD index remained around 96, at a reasonably undervalued level
• Other major Asian export currencies were even more undervalued, with the yen and won indices at 73 and 89 respectively

Regional Currencies’ Appreciation Trends Converge

If we extend the observation period to from the beginning of the year to now, we find that the cumulative appreciation of the TWD against the USD is similar to that of other regional currencies:

• TWD up 8.74%
• JPY up 8.47%
• KRW up 7.17%

Although the TWD has recently appreciated rapidly, from a longer-term perspective, its trend remains synchronized with regional currencies.

UBS’s Key Forecasts

UBS’s report suggests that the TWD’s appreciation trend will continue. Valuation models show that the TWD has shifted from moderate undervaluation to a level 2.7 standard deviations above fair value; FX derivatives markets indicate the “strongest appreciation expectation in five years”; historical experience suggests that after similar large single-day increases, immediate retracement is unlikely.

UBS expects that when the trade-weighted index of the TWD rises another 3% (approaching the central bank’s tolerance limit), the authorities may increase intervention efforts to smooth volatility.

Strategies for Different Investors

Forex Traders

You can directly trade USD against TWD or related currency pairs on forex platforms, capturing short-term fluctuations over a few days or even within the same day. If you already hold USD assets, you can use derivatives like forward contracts to hedge, locking in the gains from TWD appreciation.

New Market Entrants

It’s recommended to start with small amounts to test the waters—avoid impulsive additional investments. Forex platforms’ demo trading features are perfect for beginners to practice and test strategies without real risk.

Remember to set stop-loss points to protect yourself, and keep an eye on the actions of Taiwan’s Central Bank and the latest US-Taiwan trade developments, as these will directly influence exchange rate movements.

Long-Term Asset Allocation

With Taiwan’s solid economic fundamentals and robust semiconductor exports, the TWD may oscillate between 30 and 30.5 yuan, maintaining a relatively strong position in the long run. It’s advisable to operate USD/TWD with low leverage, keeping FX positions within 5%-10% of total assets, and diversify remaining funds into other global assets to effectively control risk. Don’t put all your eggs in one basket—combine with Taiwan stocks or bonds to strengthen overall portfolio resilience.

Historical Review: Ten-Year Exchange Rate Fluctuation Cycle

Over the past decade (October 2014 to October 2024), USD/TWD has fluctuated between 27 and 34, with a volatility of 23%, relatively moderate compared to global currencies. The JPY/USD volatility reached as high as 50% (from 99 to 161), more than twice that of the TWD.

The TWD’s interest rate changes have been small, so its movements are mainly driven by US Federal Reserve policies. During 2015–2018, amid China stock crashes and European debt crises, the Fed slowed its quantitative tightening and continued easing, strengthening the TWD. After 2018, expectations of US rate hikes increased, and the USD began to appreciate.

Post-pandemic in 2020, the Fed doubled its balance sheet from $4.5 trillion to $9 trillion, lowering interest rates to zero, causing the USD to depreciate, with the TWD hitting a historic high of 27 per USD. After 2022, due to runaway US inflation, the Fed rapidly raised interest rates, causing the USD to appreciate again, with the exchange rate returning to a narrower range after peaking at 27.

Following the 2008 financial crisis, the Fed launched three rounds of quantitative easing, and in December 2013 announced tapering the third round. US interest rates then rose, capital flowed back to the US, and the USD/TWD rate climbed from the 2013 low to 33. Until September 2024, when the Fed ended its rate hike cycle and began cutting rates, the exchange rate remained around 32.

Investor Reference Standards

Looking at the ten-year trend, USD/TWD has experienced multiple fluctuation cycles, but a “psychological level” of 30 has formed. Most believe that below 30, buying USD is favorable, and above 32, selling should be considered. This can serve as a reference framework for long-term FX investments.

Will the USD fall further now? The answer depends on the Fed’s future policy direction and whether the TWD’s appreciation will again exhibit abnormal volatility. Under the delicate balance maintained by the Central Bank, the TWD is expected to stay relatively strong within the 30 to 31 range, but large unilateral appreciation or depreciation remains unlikely.