Taiwan’s Currency Fluctuations Amid Economic Changes
On August 15, 2021, despite the ongoing challenges from the Covid-19 pandemic in Taiwan, wet market workers were preparing to return new Taiwanese dollar notes to customers, hinting at an expected positive trend in GDP and economic growth.
Recently, the Taiwanese dollar experienced a pullback after witnessing a remarkable surge, amid speculation regarding pressure from Washington to stabilize its local currency. According to LSEG data, the currency reached a three-year high before weakening by more than 3% against the US dollar. It’s worth noting that despite Tuesday’s dip, the Taiwanese dollar has appreciated over 8% against the greenback this year, coinciding with a decline in the US dollar index.
David Chao, a Global Market Strategist at Invesco, pointed out that the fluctuations in currency could lead to increased volatility. The recent rise in the Taiwanese dollar was significantly influenced by exporters converting US dollar reserves into local currency, which has been a strategy to hedge against the US dollar debt held by life insurance companies.
Notably, Taiwanese life insurance firms are major holders of US Treasury securities, facing considerable undervalued US dollar exposure. Analysts like Stephen Anglick from Moody’s have observed that the absence of distinct interventions from the Taiwan Central Bank stirs speculation about a potential allowance for a stronger currency. He remarked on the bank’s practical approach amidst a surge in forex activity.
During a press conference, Governor Yang Chin Long stated that the central bank intervened to manage what it deemed as excessive currency influx, denying claims that exchange rate manipulations were part of trade negotiations with the US. However, speculations persist that foreign exchange rates are subtly influencing broader US-Taiwan trade discussions.
Amid these developments, analysts express skepticism about significant interventions from central banks so far. Chao mentioned that the Taiwanese dollar has already hit the limits of the central bank’s monitoring range, suggesting that a retreat from intervention could signal an ongoing, quiet restructuring of currency dynamics in the market.
According to Michael Wan from MUFG Bank, the recent dollar pullback can largely be attributed to an uptick in dollar demand from importers.
Exporters Under Pressure
The surge in the Taiwanese dollar is causing some strain on the island’s export-driven technology sector. For example, stocks for Taiwan Semiconductor Manufacturing Company (TSMC) fell nearly 2% recently. Bradywan from Counterpoint Research noted that each 1% rise in the Taiwanese dollar can shave off about 0.4% from TSMC’s operating margin. A stronger local currency translates to a less valuable revenue stream when converted from US dollars, which predominantly influences TSMC’s operations in Taiwan.
Despite the challenges, strong global demand for chips may help cushion the impact, especially as the boom in artificial intelligence drives increased supplier activity. Many exporters appear to have effectively hedged their risks; for instance, TSMC partially reserves both its revenue and expenses in dollars, while others utilize foreign exchange contracts or price adjustment clauses to mitigate risks. However, recent stock losses were observed for both TSMC and Hon Hai Precision Industry Co. as they face the financial implications of these currency fluctuations.
