The New Taiwan dollar (NT dollar) is facing significant volatility, posing challenges for the central bank, according to financial analysts. Cathay United Bank’s chief economist Lin Chi-chao noted that the central bank must encourage Taiwanese exporters to convert their US dollar holdings into NT dollars to stabilize the local currency. Foreign institutional investors, who hold substantial NT dollar-denominated assets, are moving funds out of the country, exacerbating the situation.
Data from the Taiwan Stock Exchange shows that foreign institutional investors’ share of the local market capitalization increased from 45.41 percent at the end of 2024 to 48.09 percent on October 2. This rise coincided with a surge in the TAIEX, which reached an all-time high of 49,968.92 on October 6. However, the TAIEX has since plummeted by about 10,267 points, or 20.55 percent, closing at 39,701.64 on Friday amid concerns over potential US restrictions on AI data center development.
Foreign investors held US$1.743 trillion in Taiwan-listed stocks, bonds, and NT dollar deposits at the end of last month, down from US$1.927 trillion at the end of September. This amount is equivalent to 292 percent of Taiwan’s total foreign exchange reserves. Lin warned that even a 1 percent reduction in their holdings could make it difficult for the central bank to maintain the NT dollar’s stability. As of last month, the NT dollar had depreciated 3.2 percent against the US dollar this year, with continued weakness into this month.
The central bank reported net capital outflows of about US$28 billion last month. Lin emphasized that the central bank cannot rely solely on foreign exchange reserves to support the NT dollar, as sustained market intervention could be costly. Compared to the South Korean won, which appreciated 8.38 percent against the US dollar during the January-to-October period, the NT dollar has underperformed despite both economies benefiting from AI-driven export growth.
Foreign-exchange analyst Lee Chi-chan noted that the NT dollar rebounded on Friday, closing up 0.33 percent at NT$32.768. However, there are no clear signs of a sustained upward trend, as stock market volatility could persist. Lee suggested that a reversal in foreign institutional investors’ net selling or a decline in the US dollar index could support the NT dollar, but these conditions are unlikely to be met in the short term.