Taiwan’s currency posted its sharpest gains in decades this week, with market derivatives signalling sustained selling pressure on the US dollar amid heightened speculation of policy shifts and trade-driven currency revaluation.
The spread between the Taiwan dollar spot rate and its one-year non-deliverable forwards (NDFs) widened to approximately 3,000 pips on Monday, marking the deepest inversion in at least 20 years, according to Bloomberg data. The sharp divergence reflects intense demand for the local currency, amid expectations that Taiwanese authorities may tolerate further appreciation to support ongoing trade negotiations with the United States.
Driven by exporters converting foreign earnings and possible portfolio hedging by insurers, the Taiwan dollar surged as much as 5% on Monday—its strongest intraday move since 1988. The rally had a spillover effect on regional currencies including the Malaysian ringgit and Chinese yuan.
Strategists suggest the rally may continue, with limited signs of immediate easing. “The talk is around the rush to sell dollars from the exporter market and the lack of any meaningful central bank response,” said Brad Bechtel, Global Head of FX at Jefferies LLC. He added that the trend “could be the start or a sign of something bigger going on in the currency markets.”
Despite an official warning against foreign exchange speculation, NDFs—used widely by Taiwanese insurers for offshore hedging—continued to reflect strong demand for the Taiwan dollar during trading in the US market session.
The Taiwan dollar gained a further 0.3% on Tuesday, strengthening to 30.05 per US dollar and extending its rally to a seventh consecutive day. Exporter demand remained robust during the morning session, although appetite from overseas investors and retail players moderated slightly, according to traders familiar with the flows.
Three of Taiwan’s largest insurers reassured financial regulators that their risk-based capital ratios remain sound and that they do not currently plan to increase hedging activities, the Taipei-based Economic Daily News reported, citing sources.
In a move to stabilise sentiment, Taiwan’s central bank attributed the recent spike in the currency to speculative chatter and reaffirmed its stance against disorderly trading.
According to Bank of America, Taiwanese life insurers hedged only around 65% of their foreign currency exposure at the end of 2023. With dollar hedges typically incurring high costs, most firms had previously remained under-hedged to benefit from a stronger greenback—though the recent dollar weakness has raised the risk of portfolio losses and liquidity strain.
President Lai Ching-te also weighed in on Monday, attributing Taiwan’s growing trade surplus with the US to high demand for the island’s technology exports, rather than currency manipulation. The Office of Trade Negotiations confirmed the completion of initial tariff-reduction talks with the US, clarifying that currency issues were not on the agenda.
Michael Wan, Senior FX Analyst at MUFG Bank Ltd, noted that the current appreciation was likely exacerbated by low market liquidity and a confluence of factors including exporter conversion activity, hoarding of US dollar deposits, and increased hedging demand by insurers.
–Bloomberg
