New Taiwan Dollar breaks the psychological barrier of 30! The USD to TWD exchange rate experiences volatile fluctuations. How should we plan for 2025?

The Strongest TWD Rally in 30 Years: From Devaluation Fears to Monthly Surge

The New Taiwan Dollar (NTD) has recently experienced an astonishing appreciation, with nearly double-digit gains over just two trading days, marking a rare and intense volatility in decades. In early May, the USD/TWD exchange rate dropped 5% in a single day, setting a 40-year record for the largest daily decline. During the session, it even broke through the critical psychological threshold of 30, touching a low of 29.59, shocking the market.

Meanwhile, foreign exchange trading volume surged to the third-highest level in history, reflecting intense market attention to this dramatic exchange rate movement. Notably, this appreciation outperformed other Asian currencies. While the RMB, HKD, JPY, and SGD generally strengthened, their gains were significantly lower than the TWD. The SGD rose 1.41%, JPY 1.5%, and KRW 3.8%, but the TWD showed a standalone soaring trend.

As a typical export-oriented economy, Taiwan’s net foreign investment accounts for as much as 165% of GDP, making its economy highly sensitive to exchange rate fluctuations. This abnormal appreciation prompted immediate responses from government officials, with the central bank and leaders issuing statements to stabilize market expectations.

Three Driving Forces Behind the TWD Appreciation

Tariff Policies as the Trigger

The US government’s trade policy adjustments became the main catalyst for this rally. Once the tariff implementation date was confirmed, two core expectations emerged: global buyers rushed to purchase Taiwanese products to avoid tariffs, boosting foreign capital inflows; simultaneously, international institutions raised Taiwan’s economic growth forecasts, strengthening market confidence. These factors jointly provided strong support for the TWD.

Central Bank Faces Policy Dilemmas

On the day of the sharp exchange rate rise, the central bank responded but avoided discussing key details. The US government’s “Fair and Reciprocal Trade Plan” explicitly listed “currency intervention” as a review focus, constraining the central bank’s ability to respond to exchange rate volatility. Taiwan’s trade surplus in the first quarter reached $23.57 billion, up 23% year-on-year; the US trade surplus with Taiwan surged 134% to $22.09 billion. Under US pressure, the central bank found it difficult to intervene forcefully as in the past, objectively increasing the upward pressure on the TWD.

Financial Industry Hedging Amplifies Volatility

International research institutions pointed out that a single-day 5% fluctuation exceeds the explanatory scope of traditional economic indicators. Large-scale foreign exchange hedging by Taiwanese insurers and exporters, along with concentrated closing of financing arbitrage trades, jointly triggered this intense exchange rate volatility. Notably, if foreign exchange hedging returns to historical equilibrium levels, it could trigger about $100 billion in USD selling pressure, equivalent to 14% of Taiwan’s GDP, posing significant risks.

Future Outlook for USD/TWD

Can the TWD still appreciate? Market opinions vary:

Assessment of Further Appreciation Potential

Most industry analysts believe that the probability of the TWD reaching 28 per USD is extremely low. However, from a valuation perspective, the BIS( Bank for International Settlements)’s real effective exchange rate (REER) index offers an important reference. The index uses 100 as the equilibrium value; above 100 indicates overvaluation, below 100 indicates undervaluation.

As of the end of Q1, the USD index was about 113, indicating a significant overvaluation; the TWD index remained around 96, in a reasonably undervalued zone. In comparison, the JPY and KRW indices were 73 and 89 respectively, reflecting widespread undervaluation among major Asian export currencies.

Regional Currencies’ Synchronized Performance

Extending the observation period from recent months’ volatility to the period since the beginning of the year, the TWD’s appreciation has been largely in sync with regional currencies. The TWD rose 8.74%, JPY 8.47%, and KRW 7.17%, with no significant divergence. Despite the recent rapid appreciation attracting attention, from a longer-term perspective, its performance aligns with the overall trend of Asian currencies.

Key Insights from Institutional Research

Latest analyses from international financial institutions suggest the appreciation trend will continue. Valuation models show the TWD has shifted from moderate undervaluation to a fair value that is 2.7 standard deviations higher; foreign exchange derivatives markets reflect the strongest bullish outlook in five years; historical experience indicates that similar large single-day increases are unlikely to reverse immediately.

Institutions advise investors not to prematurely adopt contrarian strategies, but expect that when the trade-weighted index of the TWD rises another 3% (approaching the central bank’s tolerance limit), official intervention may intensify to smooth volatility.

Investment Strategies to Navigate TWD Fluctuations

For Experienced Investors

Those with foreign exchange trading experience and high risk tolerance may consider directly trading USD/TWD to capture short-term opportunities, including intraday trading. If holding USD assets, derivatives like forward contracts can be used to lock in exchange rates in advance, protecting gains from appreciation.

For Novice Investors

Beginners aiming to participate in this trend should follow these principles: start with small positions, avoid large-scale one-time trades, and prevent emotional decision-making. Many forex platforms offer demo accounts for practice, allowing testing of strategies.

Additionally, closely monitor central bank policies and the latest US-Taiwan trade negotiations, as these factors will directly influence exchange rates. Always set stop-loss orders to protect capital.

Long-term Asset Allocation

Considering Taiwan’s solid economic fundamentals and strong semiconductor exports, the TWD is likely to fluctuate within the 30 to 30.5 range, maintaining a relatively strong long-term trend. Long-term investors should limit foreign exchange holdings to 5%-10% of total assets, diversifying remaining assets across global markets to reduce overall portfolio risk.

Use low-leverage strategies for USD/TWD trading, combined with appropriate risk management tools. Avoid concentrating all investments in currency trading; instead, diversify with Taiwan stocks or bonds to maintain overall portfolio stability amid exchange rate volatility.

A 30-Year Review of USD/TWD Exchange Rate: Understanding Long-Term Trends

Over the past three decades, USD/TWD has experienced multiple major fluctuations. Extending the timeline from October 2014 to October 2024 (a ten-year cycle), the TWD has oscillated between 27 and 34 per USD, with about 23% volatility, relatively moderate compared to major global currencies.

In contrast, the JPY, as a traditional safe-haven currency, saw a 50% fluctuation during the same period (99 to 161 per USD), twice the volatility of the TWD. The TWD’s interest rate space is limited, and its movements mainly depend on the Federal Reserve’s policy cycle.

Historical Drivers

From 2015 to 2018, global stock market risks surged, and the US slowed its balance sheet reduction while continuing quantitative easing, strengthening the TWD. After 2018, the Fed began rate hikes, but the COVID-19 pandemic in 2020 reversed this trend, with the US balance sheet expanding from $4.5 trillion to $9 trillion, and rates falling to zero, leading to USD depreciation and the TWD reaching a high of 27 per USD.

Post-2022, due to runaway US inflation, the Fed accelerated rate hikes, causing the USD to surge, with the exchange rate rebounding from 27 to above 30, fluctuating in that range. It was only after the Fed ended this rate hike cycle and shifted to rate cuts in September 2024 that new exchange rate movements emerged.

Looking at a longer horizon, after the 2008 financial crisis, the Fed launched three rounds of quantitative easing, and in December 2013 announced tapering plans. US interest rates rose, capital flowed back to the US, and the USD appreciated against the TWD from its 2013 lows to 33.

Investment Reference

Over the past decade, the USD/TWD volatility has been largely driven by the Fed’s policies. The market has formed a “psychological threshold”: below 1:30 is seen as a buy point for USD, above 32 as a sell point. Long-term currency investors can use this as a reference for positioning.

The 30-year evolution of the USD/TWD exchange rate shows that understanding the Fed’s policy cycle is key to grasping the TWD’s long-term trend. Currently, in 2025, investors should closely monitor US monetary policy developments, as well as Taiwan’s economic fundamentals and trade conditions, to make more accurate exchange rate forecasts and investment decisions.