US AI selloff triggers stock plunge, boosting dollar and threatening New Taiwan dollar

U.S. stocks experienced another sharp pullback during this week's holiday-shortened period, driven primarily by a sell-off in AI technology stocks and uncertainty surrounding the upcoming Federal Reserve policy meeting. The Taipei Exchange index also exhibited volatility due to shifts in capital flows, with investors closely watching how U.S. market trends will impact the domestic stock market. This cross-border market linkage effect not only influences capital allocation but also directly affects the exchange rate performance of the New Taiwan Dollar.

The rapid development of AI technology previously drove up U.S. stock valuations last year; however, investor optimism regarding its future growth prospects has recently cooled, triggering a wave of selling. As major brokerage firms such as Goldman Sachs and Morgan Stanley adjusted their target prices for the AI sector, market demand for risk assets declined, and capital swiftly flowed toward safer bonds and money markets. Taiwanese tech stocks, particularly semiconductor and chip design companies, have also faced short-term pressure due to weakening sentiment in U.S. markets, further impacting the overall performance of Taiwan stocks.

The Federal Reserve's October policy meeting is viewed by the market as a critical juncture. If the Fed continues to send hawkish signals during the meeting, such as raising interest rates or reducing its balance sheet, it will further enhance the attractiveness of the U.S. dollar and place pressure on the New Taiwan Dollar. Scholars pointed out that three major factors—foreign capital withdrawals, Taiwanese enterprises investing in the United States, and the Taiwan-U.S. interest rate differential—are working together, making the depreciation of the New Taiwan Dollar more likely in the short term. If the pace of U.S. rate hikes accelerates, Taiwan's capital outflow pressure will be amplified, subsequently affecting liquidity in the local financial market.

Foreign capital withdrawals stem primarily from investor concerns over U.S. stock market volatility, with many institutions transferring funds into dollar-denominated assets or U.S. Treasuries. Taiwanese companies are also actively investing capital in the U.S. market in pursuit of higher investment returns and technological cooperation. Coupled with the fact that the interest rate differential between Taiwan and the United States widens during U.S. rate hikes, this makes the New Taiwan Dollar more susceptible to depreciation pressure in the near term. Scholars suggest that investors should closely monitor the Federal Reserve's policy statement and its impact on interest rate expectations, while moderately adjusting asset allocations to mitigate exchange rate risks.

For Taiwan's economy, sustained exchange rate volatility and capital flows not only impact the stock and bond markets but also exert a direct impact on the costs and profits of export enterprises. On the policy front, financial regulatory authorities could consider enhancing the accessibility of exchange rate risk management tools and adjusting foreign exchange controls when necessary to maintain market stability. In the long run, if Taiwan can elevate its own industrial competitiveness and reduce its reliance on the U.S. dollar capital market, it will help alleviate the economic shocks caused by exchange rate fluctuations.