From Taipei to Tokyo: The Coming Wave of Asian Currency Strength
Last month we highlighted the dramatic move in the Taiwan dollar, which surged by just over 10% over Easter. Earlier today, the Taiwan dollar broke 29 to the US dollar for the first time since 2022, taking year-to-date gains to 13%, making it the biggest gainer against the US dollar in Asia. Taiwan is rated 7 stars on our net foreign asset (NFA) model, reflecting its NFA position of 226% of GDP. Countries with positive NFA positions tend to see their currencies appreciate, making the TWD a useful case study for likely strengthening in other Asian currencies.
This significant shift in the TWD was immediately catalysed by President Trump’s tariffs announced on April 2, 2025. Aimed at correcting long-standing trade imbalances, these measures slated Taiwan to face a potential 32% import tariff from July 9th, directly underscoring its persistent undervaluation. Evidence of this had long been clear from Taiwan’s consistent current account surpluses, averaging around 10% of GDP, and was further confirmed by The Economist’s Big Mac Index, which ranked the TWD as the most undervalued currency by approximately 59%. The ensuing tariff shock, coupled with fears of US dollar weakness and portfolio adjustments, rapidly intensified the TWD’s appreciation. As a result, exporters saw revenues shrink, and life insurers holding substantial unhedged overseas investments faced significant valuation losses, catching markets off-guard.
Taiwan’s substantial NFA, accumulated over decades from trade surpluses largely in semiconductors and electronics, totals approximately US $2.4 trillion. Many foreign assets remained unhedged against currency risk, assuming a persistently weak TWD. When the currency soared, Taiwanese institutions scrambled to hedge or sell dollars, exacerbating upward pressure. The limited international convertibility of the TWD amplified this issue; unlike major currencies, the TWD is not widely traded in deep offshore markets. Consequently, when large non-trade flows hit, there were few willing counterparties, forcing Taiwan’s central bank (CBC) to become the buyer of last resort. The financial stakes remain enormous, with potential valuation losses on unhedged assets still substantial relative to GDP.
Looking ahead, Taiwan’s experience signals potential shifts for other major Asian economies. Nations that share similar characteristics—large net foreign asset positions and persistent current account surpluses—are increasingly vulnerable to similar, tariff-driven or market-driven, currency revaluations. Japan, with immense overseas holdings and a large current account surplus, might soon face renewed yen appreciation pressures. South Korea, a major electronics exporter with significant reserves, is similarly positioned. Singapore, with a high net foreign asset ratio and open trade-dependent economy, could also see currency adjustments. The most critical potential shift lies with China. Its significant trade surplus and vast reserves suggest substantial room for renminbi appreciation, potentially altering global trade dynamics.
Rapid currency appreciations risk significant financial losses, presenting complex decisions for policymakers in managing these adjustments. Taiwan’s currency surge serves as an early indicator of a broader potential shift towards appreciating Asian currencies and sustained US dollar weakness, driven by correcting global trade imbalances.
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