Taiwan Dollar Plunges on Strong US Dollar and Foreign Capital Outflows

Taipei foreign exchange market experienced a rather severe volatility today. The New Taiwan Dollar against the US dollar exchange rate moved lower all the way after opening today, eventually closing at 32.085, plunging sharply by 0.19 NT dollars for the single day, representing a significant depreciation. Even more eye-catching, today's market transaction volume burst into a massive amount of 4.798 billion US dollars, showing that under the dual squeeze of changing international financial situations and a strengthening US dollar, the trading atmosphere in the domestic foreign exchange market was extremely active. Institutional investors, exporters, foreign capital and various other forces engaged in fierce long and short battles in the foreign exchange market, leading to large fluctuations in exchange rates rarely seen in recent years.

Observing the macro background of this sharp depreciation of the New Taiwan Dollar, it is mainly closely related to the direction of the US Federal Reserve's monetary policy. Recently released US economic data showed strong performance, and market expectations that the Federal Reserve may postpone interest rate cuts or maintain high interest rate levels continue to heat up. This provides strong support for the international US dollar index, displaying a strong pattern. With the US dollar being favored, non-US currencies generally faced heavy depreciation pressure, with Asian currencies bearing the brunt. As one of the major Asian currencies, the New Taiwan Dollar naturally cannot completely shake off the strong magnetic resonance effect of this wave of international capital flowing back to the United States, and its exchange rate consequently followed the trend of Asian currencies weakening and moved lower simultaneously.

In addition to the external factor of a strengthening international US dollar, the capital flow of the domestic capital market is also a key core affecting the New Taiwan Dollar exchange rate. Although Taiwan stocks recently maintained high-level fluctuations, foreign capital's buying and selling actions in the Taiwan stock market were frequent. When foreign capital withdraws funds from the stock market and has remittance-out demand, it tends to heavily buy US dollars in the foreign exchange market, thereby causing direct depreciation pressure on the New Taiwan Dollar. In addition, as the timing approaches the end of the month and the end of the quarter, domestic importers and energy buyers often have rigid demand for US dollars. Coupled with the emergence of hedging demand for overseas investments by some life insurance industries, these factors fueled the momentum on the trading board, forming a massive US dollar buying wave in today's foreign exchange market, ultimately pushing the transaction volume to a high level of nearly 4.8 billion US dollars.

For an export-oriented economy like Taiwan that is highly dependent on exports, drastic fluctuations in the New Taiwan Dollar exchange rate have always been a double-edged sword, bringing completely different impacts to various industries. From a positive perspective, a moderate depreciation of the New Taiwan Dollar helps enhance the price competitiveness in international markets for export-oriented industries such as electronic technology, traditional industries, and auto parts. US dollar-denominated revenues can also enjoy exchange rate gains when converted into New Taiwan dollars, which has a positive benefit on gross profit margin performance in the short term. However, viewed from a negative perspective, depreciation also means an increase in import costs. In particular, most of the energy, raw materials, and agricultural and industrial raw materials required by Taiwan rely on imports. A sharp depreciation of the New Taiwan Dollar will directly push up domestic import prices, virtually increasing the production costs of domestic manufacturers, and may be transmitted to the end consumer market through the supply chain, increasing domestic imported inflation pressure.

Looking forward to the future trend of the foreign exchange market, the dynamics of the central bank and changes in international political and economic situations will be the most important variables determining whether the New Taiwan Dollar can stop depreciating and stabilize. Facing drastic fluctuations in international financial markets, the central bank has always shouldered the heavy responsibility of maintaining the stable order of the domestic foreign exchange market. When exchange rates show excessively drastic one-sided fluctuations or abnormal disorder, the central bank often steps in to regulate in a timely manner, smoothing out short-term fluctuations in the foreign exchange market by releasing US dollars or adjusting foreign exchange reserves, so as to avoid market expectations from being unilaterally distorted. In addition to continuing to closely monitor the US Federal Reserve's interest rate decision-making meeting trends and economic data performance, investors and the industrial sector also need to be prepared at any time to cope with exchange rate risks in order to reduce the potential impact of exchange rate fluctuations on business operations.

(Fact source: CNA)