Taiwan dollar eases after historic surge as officials deny currency talks with U.S.

Taiwanese dollar pulled back Tuesday after a historic surge that saw it clock multi-decade gains amid speculation about pressure from Washington on strengthening the local currency.

It weakened over 3% against the U.S. dollar on Tuesday, after a meteoric 9% rally over the previous two trading days to hit three-year highs, and logging its sharpest daily gains Monday since at least 1981 according to LSEG data.

Despite Tuesday's weakness, the Taiwanese dollar is still up over 8% this year against the greenback, while the U.S. dollar index is down by the same year to date.

"We're seeing currency moves more [volatile] than what we saw during the Asian financial crisis era," said David Chao, global market strategist at Invesco.

The recent dramatic upward swings in the currency were largely driven by exporters' rush to convert U.S. dollar reserves to the local currency as the U.S. dollar faltered, and life insurers' intensified hedging for their U.S. dollar debt holdings, experts said.

Taiwanese life insurers are among Asia's largest holders of U.S. bonds and have been sitting on huge, underhedged U.S. dollar exposures, according to market analysts.

Investors are closely monitoring the Taiwanese central bank as its "notable absence" has fanned speculation that the authorities were tolerating a stronger currency to win trade concessions from U.S., said Stefan Angrick, Head of Japan and Frontier Market Economics at Moody's Analytics. "The central bank has been unusually hands-off amid soaring forex volumes."

Governor Yang Chin-long said at a press conference Monday that Taiwan's central bank had stepped in to curb what it deemed as "excessive" inflows while refuting claims that exchange rates were part of the U.S. trade negotiation. He did not elaborate on the nature of intervention.

Despite official denial, foreign exchange rates might "quietly be on the table in broader U.S.-Taiwan trade conversation," Angrick said. President Donald Trump has advocated for a weaker greenback to boost U.S. export competitiveness.

Analysts are also largely skeptical of any meaningful intervention from the central bank so far. The Taiwanese dollar has already reached the upper bound of the central bank's monitoring range, Invesco's Chao said, "If the central bank continues to step back, that may be the market's cue that a quiet currency realignment is underway."

Tuesday's pullback was mostly due to the returning dollar demand by importers, according to Michael Wan, FX strategist at MUFG Bank, who believes the central bank has not intervened "very aggressively."

Separately, Taiwan's financial supervisory commission has reportedly held meetings with some of the island's largest insurers to assess the risks a weaker greenback poses to their U.S. bond holdings. Three insurers said their risk-based capital remains within regulatory standards, according to Taipei-based Economic Daily News.

Analysts see room for further gains in Asian currencies including Taiwanese dollar, betting that Trump tariffs could backfire on the American economy and that signs of progress in U.S.-China trade talks may revive trade flows in the region, supporting demand for Asian assets.

"Momentum behind TWD strength may have legs if the broader de-escalation narrative holds, [and] if tariff implication on growth proves more manageable than feared," said Christopher Wong, currency strategist at OCBC Bank. "A more market-determined TWD may be helpful during trade talks."

U.S. senior officials, including Treasury Secretary Scott Bessent, have recently sounded more upbeat about the prospects for reaching a trade deal with China. Beijing last week also signaled its openness to start trade negotiation with Washington.

Besides the Taiwanese dollar, other Asian currencies have also rallied in recent weeks as the U.S. dollar has faltered. Chinese offshore yuan hit a six-month high of 7.1834 against the greenback on Monday, before paring some of the gains on Tuesday.

"Currencies with the largest trade surpluses are more exposed to fears of a 'Plaza Accord 2.0,' and TWD is at the top of this list," said Ju Wang, head of Greater China FX & rates at BNP Paribas.

Plaza Accord refers to an agreement signed in 1985 when G5 nations agreed to depreciate the U.S. dollar against the German mark and the Japanese yen to address trade imbalances.

The Taiwan dollar's sharp rally piled on some pressure on the island's export-heavy tech sector, as a stronger local currency makes goods expensive for foreign buyers, reducing its competitiveness.

Taiwan Semiconductor Manufacturing Co shares fell for a second day, losing nearly 2% on Tuesday.

Every one percentage point of appreciation in the Taiwanese dollar is estimated to trim TSMC's operating margin by approximately 0.4 percentage point, said Brady Wang, Associate Director at Counterpoint Research. A stronger local currency reduces the value of its U.S. dollar-quoted revenue and most of TSMC's operations are in Taiwan.

The world's largest contract chipmaker gave its second-quarter earnings forecast on the assumption of a USD/TWD exchange rate of 32.5.

US Dollar/Taiwan Dollar FX Spot Rate

"Local chip and electronics manufacturers, which earn the bulk of their revenue in U.S. dollars, will feel the pinch as those earnings translate into fewer local dollars," said Angrick.

But strong global chip demand may still be able to cushion the blow, Angrick added, noting the artificial intelligence boom and the push for advanced chips will continue to make Taiwan a critical supplier with few close competitors.

Many exporters also appear to be well hedged. TSMC, for example, books both revenue and costs largely in dollars, while others rely on forex contracts or price adjustment clauses, said Phelix Lee, an equity analyst covering tech firms.

Taiwan Semiconductor Manufacturing Co shares fell for a second day Tuesday, losing nearly 2%, while Hon Hai Precision Industry Co gained 2.5%.