When Surpluses Sting: The TWD Story
Recent US tariffs have sharply highlighted concerns regarding the valuation of the Taiwan dollar (TWD). On April 2, 2025, President Donald Trump introduced a 10% baseline tariff on imports, supplemented by reciprocal tariffs linked to bilateral trade balances. Taiwan faces a substantial 32% tariff due to its large trade surplus. Taiwan has also run a persistent current account surplus, averaging over 10% of GDP for two decades—strongly indicating significant currency undervaluation.
Supporting this view, The Economist's Big Mac Index identified the TWD as the most undervalued currency among 52 countries surveyed in 2024, by approximately 59%. This severe undervaluation contrasts sharply with Taiwan's high economic prosperity, which would typically be reflected in higher local prices for non-tradable goods such as Big Macs.
These tariffs, combined with fears of US dollar devaluation and Value-at-Risk (VaR)-based portfolio adjustments, triggered a rapid appreciation of the TWD. The currency surged nearly 10% against the US dollar over just two trading sessions during Easter, reaching its highest level in two years. This abrupt move exposed vulnerabilities stemming from Taiwan's prolonged current account surpluses and significant accumulation of net foreign assets (NFA).
Driven predominantly by semiconductor and electronics exports, Taiwan's persistent surpluses have accumulated NFA totalling approximately US$2.4 trillion—around 226% of GDP, one of the highest ratios globally. Historically, Taiwanese institutions have maintained substantial US-dollar-denominated assets largely unhedged, assuming TWD weakness or stability to avoid hedging costs.
Recent market volatility highlights the risks inherent in this strategy. Hedging or liquidating foreign assets amid sudden currency fluctuations directly impacts exchange rates. As Taiwanese institutions rapidly moved to hedge or liquidate assets during recent volatility, upward pressure on the TWD intensified.
A significant complication arises from the TWD’s limited international convertibility, severely restricting potential counterparties for large FX transactions. Unlike currencies with deep offshore markets, few international banks actively facilitate substantial TWD trades. Consequently, particularly for non-trade-related flows or large transactions, the Central Bank of the Republic of China (Taiwan) frequently becomes the primary counterparty, given its currency management role.
To illustrate this exposure, even if 50% of Taiwan’s overseas assets were hedged, roughly US$1.2 trillion remains at risk. A 10% TWD appreciation equates to potential losses of approximately 11% of GDP, underscoring significant financial vulnerability. Ongoing market volatility may further strengthen the TWD in upcoming months.
Long-term, persistent NFA surpluses inevitably result in currency appreciation as overseas profits are repatriated. Although explicit discussions around a fair exchange rate remain uncommon, targeting a balanced current account is something most countries could accept. Guided by the Big Mac Index, several Asian currencies—including the Japanese yen, Korean won, Singapore dollar, and Chinese renminbi—appear significantly undervalued. Backed by substantial net foreign asset positions, these currencies differ markedly from the circumstances that precipitated the 1997 Asian financial crisis. Instead, current conditions indicate a potential reversal, suggesting coming Asian currency strength and an emerging crisis for the US dollar.
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