Taiwan Dollar Slumps on Central Bank Easing Extension Amid Rising Risks

The New Taiwan dollar closed at 32.76 per U.S. dollar in the Taipei foreign exchange market today, a decline of 0.168 from the previous trading day. Trading volume reached $3.938 billion. This drop marks the largest depreciation in the past three months, indicating that market assessments of foreign exchange risks in Taiwan are becoming increasingly severe.

Over the past two weeks, the New Taiwan dollar has continued to weaken against the U.S. dollar, driven primarily by the combined effects of rising expectations for U.S. Federal Reserve interest rate hikes and a global decline in risk appetite. Since early 2024, the Federal Reserve has raised its benchmark interest rate multiple times, causing U.S. dollar funds to flow into American markets and exerting pressure on the New Taiwan dollar. Additionally, because Taiwan’s exports rely heavily on the U.S. market, a stronger U.S. dollar poses challenges to the costs and profit margins of Taiwanese export companies.

The Central Bank of Taiwan also adjusted its foreign exchange policy at the beginning of this month, announcing that it would extend its accommodative exchange rate policy until the end of the year to prevent an excessive depreciation of the New Taiwan dollar from negatively impacting the economy. Despite this, the market remains pessimistic about the future trajectory of the New Taiwan dollar. Increased hedging demand from investors has led to a significant outflow of funds toward the U.S. dollar and other safe-haven assets.

The depreciation of the New Taiwan dollar has a dual impact on the Taiwanese economy. First, rising import costs, particularly in energy and raw materials, may push up the general price level, thereby affecting the Consumer Price Index. Second, for debts denominated in U.S. dollars, the depreciation of the New Taiwan dollar will increase repayment costs, adding to financial pressures on businesses. However, export firms may benefit from the stronger U.S. dollar by securing higher revenue in dollar terms, meaning certain industries could gain from the exchange rate shift.

In the long term, the trajectory of the New Taiwan dollar will be influenced by U.S.-China trade relations, the restructuring of global supply chains, and Taiwan’s own economic structural adjustments. If the United States continues to raise interest rates and global risk sentiment fails to recover, the New Taiwan dollar may continue to face depreciation pressure. Conversely, if Taiwan’s export performance remains robust and foreign capital inflows increase, the exchange rate may have the opportunity to rebound. Investors and businesses need to closely monitor economic developments across the Taiwan Strait and changes in international financial markets to adjust their risk management strategies accordingly.

(Source: CNA)