Analysis of the Taiwan Dollar's Weakness Against the U.S. Dollar : Causes and Future Outlook

0. Before getting into detail..

 

As an individual earning income in foreign currency and being involved in semi-conductor industry, I have been observing the recent depreciation of the Taiwan Dollar (NTD) against the U.S. Dollar (USD). This posting aims to analyse the causes of this particular trend and discuss potential strategies moving forward.

 

1. Current Situation

In recent international foreign exchange markets, the USD has shown notable strength, while the NTD has experienced a decline in value. This post seeks to analyse the causes of this phenomenon and provide an outlook on future fluctuations in the NTD's value.

 

2. Background

Taiwan plays a pivotal role in the global technology supply chain, particularly excelling in the semiconductor industry. In 2024, Taiwan's economic growth rate was revised upward to 4.27%, driven by increased demand for artificial intelligence (AI) technologies. However, traditional commodity exports have remained sluggish due to China's real estate market downturn and U.S.-China tensions. Additionally, U.S. protectionist policies present new challenges to Taiwan's export-driven economy.

 

In 2024, the New Taiwan Dollar (NTD) depreciated by 5.29% against the U.S. Dollar (USD) in the first half of the year, despite the Central Bank's intervention, which included selling a net US$9.06 billion to stabilise the exchange rate. (Taiwan dollar fell 5.29% in 1H 2024 despite Central Bank intervention)

 

3. Correlation Between USD and NTD

The relationship between the USD and NTD is influenced by various economic factors and policies:

• Exchange Rate Fluctuations: The USD/NTD exchange rate fluctuates in real-time within international foreign exchange markets. As of the current date, 1 USD is approximately equivalent to 33.14 NTD.
• Export Competitiveness: As an export-oriented economy, Taiwan's NTD value directly impacts its export competitiveness. A weaker NTD enhances the price competitiveness of Taiwanese products, potentially boosting exports.
• Monetary Policies and Market Stability: The Central Bank of the Republic of China (CBC) adjusts the NTD/USD exchange rate to maintain market stability. Such interventions aim to mitigate exchange rate volatility, reduce currency risk for importers and exporters, and uphold market confidence.
• Global Economic and Trade Environment: Changes in the U.S. economy and trade policies influence the USD/NTD correlation. For instance, the U.S. administration's protectionist stance affects Taiwan's exports, leading to fluctuations in the NTD's value.

As abovementioned, while the Taiwanese government intervenes in the foreign exchange market to manage exchange rate volatility, these interventions are primarily aimed at maintaining stability rather than deliberately devaluing the NTD. The CBC has reportedly clarified that such market interventions are intended to uphold market order and are not indicative of a policy to intentionally weaken the currency.

 

Furthermore, the CBC conducts monetary policy through benchmark interest rate adjustments. In March 2025, the CBC maintained the key discount rate at 2%, reflecting its stance on current economic conditions.

 

4. Causes of NTD Depreciation

Several factors contribute to the NTD's depreciation against the USD:

• U.S. Tariff Policies: President Donald Trump's administration has proposed high tariffs on major trading partners, including China. Such measures raise concerns about potential impacts on Taiwan's semiconductor and electronics exports, thereby affecting the NTD's value.
• Global Economic Growth Concerns: The World Bank warns that U.S. tariff policies could reduce global economic growth forecasts by 0.3 percentage points. This projection negatively impacts export-driven economies like Taiwan, contributing to NTD weakness.
• U.S. Trade Surplus Criticisms: The U.S. has identified Taiwan among countries with significant trade surpluses, expressing concerns over Taiwan's trade practices. This designation adds pressure to Taiwan's currency and trade policies, influencing the NTD's value.

According to CNA, October 2024, the New Taiwan dollar dropped over 5 percent against the U.S. dollar in the first half of this year, even as Taiwan sold a net US$9.06 billion to stabilise the exchange rate. In a written report submitted to the Legislature, the Central Bank said factors acting on Taiwan's foreign exchange market in the first half of 2024 mainly originated in the United States. During the first half of year 2024, Taiwan's forex market saw excess demand for U.S. dollars, driving the New Taiwan dollar down 5.29 percent and prompting the Central Bank to intervene by selling a net US$9.06 billion to bolster Taiwan's currency. 

 

In summary, the NTD's depreciation is primarily driven by external factors, including U.S. trade policies and global economic conditions, rather than deliberate actions by the Taiwanese government. While the CBC intervenes to stabilise the currency, these interventions are not aimed at achieving a specific exchange rate target.

 

5. History and dynamics:

In the first half of 2024, the New Taiwan Dollar (NTD) depreciated by 5.29% against the U.S. Dollar (USD), despite the Central Bank's intervention through the sale of a net US$9.06 billion to stabilise the exchange rate. 

 

Understanding the Dynamics:

1. Excess Demand for U.S. Dollars:
   An "excess demand for U.S. dollars" occurs when the demand for USD in Taiwan's foreign exchange market surpasses its supply. This imbalance can result from various factors including:
   
   • Economic Resilience in the U.S.: A robust U.S. economy can attract global investments, increasing demand for USD.
   • Delayed Interest Rate Reductions: If the U.S. Federal Reserve delays anticipated interest rate cuts, investors might hold onto USD-denominated assets, maintaining high demand for the currency.
   • Rising U.S. Bond Yields: Increased yields on U.S. government bonds can make them more attractive, drawing more capital inflows and boosting USD demand.
2. Depreciation of the Taiwan Dollar:
   When the demand for USD exceeds its supply in Taiwan, the value of the NTD tends to fall. Currency values are influenced by supply and demand dynamics; increased demand for a foreign currency like the USD, without a corresponding supply, leads to a decrease in the domestic currency's value. This depreciation can affect import and export dynamics, inflation rates, and overall economic stability.

 

6. Taiwan's Strategic Response

In response to the NTD's depreciation last year (2024), Taiwan's Central Bank Intervened by selling USD reserves and purchasing NTD aiming at:

• Increase NTD Supply: By selling USD and buying NTD, the Central Bank increased the supply of NTD in the market, aiming to stabilise its value.
• Restore Market Confidence: Such interventions signal the Central Bank's commitment to maintaining currency stability, which can bolster investor confidence.

Despite these efforts, the NTD continued to depreciate, highlighting the challenges central banks face when external factors heavily influence currency markets. The interplay between excess demand for USD, NTD depreciation, and Central Bank intervention underscores the complexities of currency markets. 

 

According to Reuters as of March 26, 2025,

Taiwan's central bank on Wednesday defended the island's trade and currency record ahead of possible tariffs from U.S. President Donald Trump, saying the high current account surplus was a structural problem and Washington understood that.
Trump officials have said that much of the reciprocal tariff focus, to be announced on April 2, will be on 15 countries that have the highest trade surpluses. They did not name these, but according to U.S. Census Bureau data, Taiwan is one of those 15 with the largest trade surpluses with the United States, along with countries like China and South Korea plus the European Union.
In a report to lawmakers, Taiwan's central bank noted that the island's current account surplus last year was 14.3% of GDP. "It reflects the structural problem of the sharp increase in U.S. demand for Taiwan's technological products and the expansion of our trade surplus with the United States. The U.S. side understands this point of view," the central bank said.
Taiwan runs a large trade surplus with the United States, which surged 83% last year, with the island's exports to the U.S. hitting a record $111.4 billion, driven by demand for high-tech products such as semiconductors, a sector Taiwan dominates.
"As Taiwan's trade surplus with the United States is relatively large, the risk of bilateral trade disputes between Taiwan and the United States must be carefully managed," the central bank said.
Taiwan has previously been put on a foreign exchange "monitoring" list by the U.S. Treasury Department given its trade surplus and outsized current account surplus.
The central bank said its exchange rate policy aims to maintain an "orderly" foreign exchange market and financial stability, and that it never intended to gain an unfair competitive advantage in trade. It also expressed concern about Trump's frequent economic and trade policy flip-flops and lack of clarity about his plans on tariffs in particular. "Especially, the impact of the tariff increase policy is the most significant, which is detrimental to the growth of the global economy and may push up inflation," the central bank said.
Reference link: Taiwan defends trade, currency record ahead of possible US tariffs

 

 

7. Conclusion

The interplay between the USD's strength and the NTD's weakness is influenced by a complex array of factors, including trade policies and global economic dynamics. As abovementioned, it is key to understand that the central banks can influence exchange rates through interventions, however, global economic conditions and investor sentiments often play significant roles in determining currency values.

 

Experts anticipate that the USD's strength will persist in the short term, driven by the U.S. economy's resilience and potential interest rate changes. To mitigate adverse effects on exports, Taiwan's government and businesses are strategising to address these external challenges.

 

To maintain economic stability and competitiveness, Taiwan must proactively navigate these challenges through strategic policy measures and continuous engagement with international trade partners.

 

 

Photo by Joel Fulgencio on Unsplash