The USD to TWD exchange rate experiences a dramatic shift! Investment strategies after breaking the 30 barrier

Last May, the Asian foreign exchange market experienced a rare and intense turbulence that hadn’t been seen in decades. The New Taiwan Dollar (NTD) surged nearly 10% in just two trading days, breaking through the critical psychological level of 30 yuan, a key mental barrier for investors. This rapid reversal in the USD/NTD trend caught the market off guard. This article will analyze the driving factors behind this exchange rate movement, assess the sustainability of the appreciation, and provide practical trading strategies for investors.

A Decade-Long Perspective: Understanding the Fundamentals of USD/NTD Trends

Before exploring the recent abnormal volatility, it’s essential to understand the longer-term logic behind the NTD exchange rate.

Over the past decade (October 2014 to October 2024), USD/NTD has fluctuated between 27 and 34, with a volatility of about 23%. In comparison, the Japanese Yen (JPY) has experienced a 50% fluctuation (from 99 to 161 USD/JPY), indicating that the NTD has maintained relatively stable performance among major global currencies.

What is the core driver behind this stability? The answer points to the Federal Reserve’s policy cycle. The NTD’s interest rates have limited variation, so its exchange rate movements mainly depend on the US Federal Funds Rate’s direction. Between 2015 and 2018, after the European debt crisis, the US slowed its balance sheet reduction (QT) and resumed quantitative easing, leading to a strengthening of the NTD, with the exchange rate touching 27. However, after 2018, US rate hike expectations reignited, and the dollar strengthened again. By 2020, with the outbreak of the pandemic, the Fed’s balance sheet ballooned from $4.5 trillion to $9 trillion, and rates were cut to zero, exerting significant depreciation pressure on the dollar, causing the NTD to surge once more.

Post-2022, as US inflation spiraled out of control, the Fed embarked on an aggressive rate hike cycle, pushing the dollar from 27 to a high of 33. This historical context is crucial for understanding the future evolution of USD/NTD.

The Unexpected Breakthrough of the 30 Yuan Psychological Barrier: What Underlying Forces Are at Play?

The currency storm in May last year struck suddenly. A month earlier, markets were worried about the NTD breaking below 34 or even 35 yuan. Who would have thought that just 30 days later, the situation would completely reverse? On May 2, the NTD/USD hit a 40-year high with a single-day jump of 5%, closing at 31.064, setting a 15-month high. Then, on May 5, it rose further, with a total gain of 4.92%, and intraday even touched 29.59, the third-highest forex trading volume on record.

In just two trading days, the NTD appreciated nearly 10%. Notably, before this surge, the NTD had only depreciated 1% from early 2025 to early April. This stark contrast highlights the dramatic shift in market sentiment.

Other Asian currencies also appreciated but to a lesser extent: SGD up 1.41%, JPY up 1.5%, KRW up 3.8%. The NTD’s appreciation was uniquely pronounced. What market forces are behind this?

Three Main Drivers of the Rapid Reversal in USD/NTD

First Wave: Expectations Shift Due to Reciprocal Tariff Policies

The new US administration announced a 90-day delay in implementing reciprocal tariffs, sparking two strong market expectations: first, a surge in global procurement, benefiting Taiwanese exporters as a key part of the global supply chain; second, the IMF unexpectedly raised Taiwan’s full-year economic growth forecast, coupled with stellar performance in the Taiwan stock market, further boosting confidence in Taiwan’s economic outlook.

Foreign capital flooded in, becoming the primary driver behind the NTD’s rally. As an export-oriented economy, Taiwan’s trade surplus in Q1 reached $23.57 billion, up 23% year-over-year, with the US trade surplus soaring 134% to $22.09 billion. This massive net foreign exchange inflow naturally supported the NTD.

Second Wave: The Central Bank’s Dilemma

On May 2, Taiwan’s central bank issued an emergency statement attempting to explain the currency movement. It attributed the surge to “market expectations that the US may request trading partners to appreciate their currencies.” However, it did not directly address the market’s main concern—whether US-Taiwan trade negotiations involve exchange rate clauses.

This ambiguous stance reveals a deeper dilemma. The Trump administration’s “Fair and Reciprocal Trade” plan explicitly scrutinizes “currency interventions,” constraining the central bank’s options. Historically, the central bank could effectively suppress excessive NTD appreciation, but now, in the sensitive context of US-Taiwan negotiations, any intervention risks being interpreted by the US Treasury as “currency manipulation,” inviting international criticism.

The central bank fears worsening US-Taiwan relations and also worries that excessive NTD appreciation could harm export competitiveness. This double bind significantly limits its policy space.

Third Wave: Financial Institutions’ “Panic Hedging” Amplifies Volatility

UBS’s latest research indicates that a single-day 5% appreciation far exceeds what traditional economic indicators would suggest. The report further analyzes that large-scale hedging operations by Taiwanese insurers and exporters, along with concentrated unwinding of NTD financing arbitrage trades, contributed to this currency storm.

More alarmingly, UBS warns that when the NTD corrects, insurers and exporters may further increase hedging. Restoring FX hedging to historical levels could trigger a USD selling pressure of about $1 trillion—equivalent to 14% of Taiwan’s GDP. This potential risk is significant.

The Financial Times reports that the main driver behind this surge was Taiwanese life insurers’ “panic hedging” due to fears of USD depreciation. Taiwanese insurers hold about $1.7 trillion in overseas assets, mainly US Treasuries, but have lacked sufficient FX hedging mechanisms because the central bank historically maintained stable exchange rates. Now, with this “safety net” loosening, insurers are eager to hedge their positions, and their concentrated unwinding has become a key factor in the currency movement.

Fundamentals and Reasonable Valuation of USD/NTD

Will the NTD continue to appreciate? This is the key question for investors. The BIS’s real effective exchange rate (REER) index offers an important assessment framework. An index of 100 indicates fair value; above 100 suggests overvaluation, below 100 indicates undervaluation.

At the end of Q1, the USD REER was around 113, indicating significant overvaluation; the NTD REER hovered around 96, in a “reasonably undervalued” zone. This suggests room for further appreciation.

But how much? Most industry insiders believe that a move to 28 USD/NTD is unlikely. Looking at the longer-term trend from the start of the year, the appreciation of the NTD (8.74%) is similar to that of the JPY (8.47%) and KRW (7.17%). Despite recent rapid gains, the NTD’s performance remains aligned with regional peers over the longer horizon.

UBS’s latest report offers an interesting insight: although the NTD has recently surged, valuation models, FX derivatives market expectations, and historical experience suggest this trend may continue. The valuation model shows the NTD has shifted from moderate undervaluation to a level 2.7 standard deviations above fair value; FX derivatives reflect the strongest appreciation expectation in five years; historical patterns indicate that such large gains are unlikely to reverse immediately.

UBS advises investors not to prematurely bet against the trend but notes that if the trade-weighted index of the NTD rises another 3% (approaching the central bank’s tolerance limit), Taiwan’s authorities might step up interventions to stabilize volatility.

Practical Strategies to Capitalize on the NTD Appreciation

Given the evolving USD/NTD landscape, different investor types should adopt tailored strategies.

For experienced forex traders with higher risk tolerance:

• Engage in direct trading of USD/TWD or related currency pairs on forex platforms, aiming to profit from short-term volatility through day trading or swing trading.
• If holding USD assets, consider using forward contracts or other derivatives to hedge, locking in the appreciation gains and mitigating subsequent depreciation risks.

For novice traders:

• Follow strict rules. Start with small positions to test the waters, observe market reactions over time before increasing exposure.
• Avoid impulsive chasing of short-term gains; emotional trading can lead to losses.
• Use demo accounts offered by many platforms to practice and refine strategies without risking real money.

For long-term investors:

• Taiwan’s economic fundamentals remain solid, with robust semiconductor exports. The NTD may oscillate between 30 and 30.5 in the medium term, maintaining relative strength.
• However, FX assets should only constitute a small portion (5-10%) of a diversified portfolio. Allocate remaining funds across global assets to manage currency risk effectively.

Risk management essentials:

• Always set stop-loss orders to protect against adverse moves. Many platforms support automatic stop-loss features—use them diligently.

• Keep abreast of Taiwan’s central bank statements and US-Taiwan trade negotiations, as these will influence USD/NTD trends.

• Diversify investments beyond FX, including Taiwan stocks and bonds, to reduce overall risk.

• Use low leverage when trading USD/TWD to participate in appreciation opportunities while controlling risk.

• Practice with demo accounts to test your trading system and reduce trial-and-error costs in live trading.

Long-Term Outlook: USD/NTD Trajectory

Reviewing this currency movement, we see multiple forces at play—geopolitical shifts, global trade adjustments, central bank constraints, arbitrage activities, and market psychology. In the short term, USD/NTD may continue to fluctuate; however, in the medium term, amid supply chain realignments and US policy uncertainties, the NTD’s relative strength could persist.

For investors, the key is not to bet on short-term direction but to build a sound decision-making framework—grounded in macro fundamentals, attentive to central bank signals, vigilant about structural risks behind anomalies, and disciplined in risk management. Only then can one navigate the volatile forex market with stability.