The central bank might be facing growing pressure from Washington to address Taiwan’s large trade surplus with the US, but a repeat of the sharp appreciation of the New Taiwan dollar as seen in 1985, following the coordinated currency intervention by the US, Japan, Germany, France and the UK under the Plaza Accord, appears unlikely.
This is because the central bank’s primary responsibility is to safeguard the nation’s economic growth and financial stability. A rapid surge in the local currency would dampen the earnings of exporters, particularly in the electronics sector, which remains a major pillar of Taiwan’s economy. In addition, as the liberalization of global capital markets since 2000 has significantly increased currency trading volumes and cross-border capital flows, large-scale interventions in foreign exchange markets are more difficult to execute effectively today.
Still, the recent sharp appreciation of the NT dollar against the US dollar draws uneasy parallels with Japan’s experience in the mid-1980s. The dramatic revaluation of the yen, alongside other structural factors, contributed to Japan’s prolonged economic stagnation. The ripple effect spread to Asian foreign exchange markets, causing sharp appreciations in many regional currencies, including the NT dollar. The steep increases eroded local exporters’ competitiveness and led to widespread factory closures and layoffs in Taiwan, the Taiwan Institute of Economic Research said. However, Taiwan’s export landscape has shifted significantly in recent decades, with electronics manufacturers replacing textile firms as the nation’s major exporters and occupying a stronger position in global supply chains.
A strong NT dollar remains a headwind for local exporters, sparking concerns that Taiwan might follow a trajectory similar to Japan’s, especially as the local currency’s sharp appreciation coincided with the conclusion of the initial trade talks between Taiwan and US earlier this month. On May 2, just one day after the talks ended, the NT dollar surged nearly 3 percent to NT$31.064 against the US dollar.
Central bank Governor Yang Chin-long (楊金龍) has denied speculation that Taiwan was under pressure from the US Department of the Treasury to revalue the NT dollar, as part of a broader effort to trim the nation’s trade surplus with the US, help reduce a proposed 32 percent “reciprocal” tariff on imports from Taiwan and ahead of the US Treasury’s release of its latest report on the foreign exchange policies of its major trading partners (Taiwan was included on the US’ currency monitoring list last year).
Yang attributed the NT dollar’s sharp appreciation to market dynamics — including speculative sentiment, exporter sales of US dollars and strong net buying of local equities by foreign investors. He added that the central bank stepped into the foreign exchange market to curb abnormal fluctuations in the NT dollar, rather than allowing the currency’s rise to proceed unchecked, as some media reported.
The NT dollar yesterday fell for a sixth straight session, closing at NT$30.455 against the greenback. Despite the recent pullback, the local currency has appreciated 7.34 percent since the start of the year, from NT$32.868 on Jan. 2.
Given the inherently unpredictable nature of foreign exchange markets, the central bank should adopt measures to support local businesses to navigate the volatility of the NT dollar against the greenback. In addition, government agencies should be ready with supportive measures for sectors most vulnerable to foreign exchange volatility, such as manufacturers of machine tools, textiles and chemicals, given their smaller operational scale and limited market exposure.
Regardless of the uncertainty of the external environment, minimizing the impact of currency fluctuations should remain a key priority for policymakers.
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