Taiwan Central Bank Addresses U.S.-Taiwan Trade Deal’s Forex Impact

The Taiwan Central Bank has announced that the impact of the recent trade and tariff agreement between Taiwan and the United States on the Taiwan dollar’s exchange rate is deemed to be within a “controllable range.” This declaration, made on January 24, 2024, follows the agreement that reduces tariffs on Taiwanese goods from 20 percent to 15 percent and outlines significant financial commitments from Taiwanese firms.

Under the terms of this deal, Taiwanese companies are set to invest $250 billion in the United States. Additionally, Taiwan will provide an extra $250 billion in credit to support these investments. The central bank’s report to lawmakers highlighted that while this influx of capital may increase demand for U.S. dollars, the overall effect on the Taiwan dollar is manageable.

In recent months, the Taiwan dollar experienced volatility, particularly in May when it surged against the U.S. dollar amid speculation that the U.S. government sought a stronger currency. Both the Taiwanese government and the central bank denied these claims, emphasizing their commitment to maintaining currency stability.

The central bank noted that Taiwan’s large exporters have accumulated substantial foreign-currency assets. This means that they can draw from these reserves for their U.S. dollar needs without needing to convert Taiwan dollars, thereby minimizing potential disruptions in the domestic foreign-exchange market.

The report further explained that Taiwanese firms can issue U.S. dollar-denominated bonds or secure U.S. dollar financing through banks. This strategy allows them to utilize future dollar revenues to service debts, creating a “natural hedging effect.”

Looking ahead, the trade agreement is scheduled for phased implementation over several years. This gradual approach is expected to help mitigate firms’ demand for U.S. dollars, further easing the impact on Taiwan’s foreign-exchange market. The central bank reiterated that it did not participate in the trade discussions, maintaining its focus on currency regulation and stability.

As the agreement progresses, stakeholders will closely monitor its implications for both Taiwanese businesses and the broader economy, ensuring that the balance between growth and currency stability is maintained.