Taiwan Central Bank Assesses Trade Deal’s Impact on Dollar Stability

The Taiwan Central Bank has stated that the effects of the recent trade deal between Taiwan and the United States on the Taiwan dollar’s exchange rate are manageable. Announced earlier this month, the agreement reduces tariffs on Taiwanese goods from 20 percent to 15 percent. Additionally, Taiwanese companies are set to invest $250 billion in the U.S., with Taiwan promising another $250 billion in credit to support further investments.

In a report presented to lawmakers on January 24, 2024, the central bank addressed concerns regarding potential fluctuations in the Taiwan dollar’s value following this trade agreement. The report indicates that while the new investment commitments may increase demand for U.S. dollars, the central bank believes the impact on the currency will remain “within a controllable range.”

The central bank noted that many of Taiwan’s large exporters have significant foreign-currency assets, which can mitigate the need for converting Taiwan dollars into U.S. dollars for investments. This approach can help stabilize the domestic foreign-exchange market by reducing the volume of currency conversion transactions.

Given that the expected revenue from these investments will be denominated in U.S. dollars, Taiwanese companies can also issue U.S. dollar–denominated bonds or secure dollar financing through banks. This strategy allows them to use future dollar revenues to repay these loans or service their debt, thus achieving what the bank referred to as a “natural hedging effect.”

The trade agreement is designed to be implemented in phases over the coming years. This gradual approach will help to manage firms’ demand for U.S. dollars over time, further reducing potential volatility in the foreign-exchange market.

The Taiwan Central Bank reiterated that it was not involved in the trade and tariff negotiations with the United States, emphasizing its role in maintaining currency stability rather than influencing trade policy. As the implementation of the agreement progresses, the central bank will continue to monitor the situation closely to ensure that the Taiwan dollar remains stable within the global market context.