The Taiwan dollar’s most extreme surge since 1988, along with prospects for continued appreciation, has triggered calls for one of the most export-dependent Asian economies to overhaul its growth model.
For decades, Taiwan’s careful management of its currency’s exchange rate has helped transform the economy into one of the world’s export powerhouses. But the resulting current-account surpluses have repeatedly stoked concerns in Washington, where the Treasury Department has kept it on a “monitoring list” for its foreign-exchange practices.
At home, some executives, economists and government officials are arguing a stronger exchange rate could be the spur Taiwan needs to overhaul its economy to focus on promoting domestic demand, innovation and higher-value added production.
While the Taiwan dollar continued to settle on Wednesday, it followed its biggest two-day gain since the 1980s. That historic rally stirred memories of past turning points: Paul Peng, chairman of electronic display maker AU Optronics Corp., noted that a similar surge in the early 1990s led to a “good transformation” that helped spur Taiwan’s semiconductor industry.
“Taiwan may also take this opportunity to think about our next transformation,” toward products like artificial intelligence, he said.
A stronger Taiwan dollar would also give the public greater spending power, which could drive domestic demand, Tung Tzu-hsien, chairman of computer and communication equipment maker Pe gatron Corp., said at an event in Taipei on Tuesday.
The sentiment adds to years of calls from academics to rethink the policy maintaining a weak currency, which, they say, has imbalanced the economy in favor of exporters while inhibiting incentives for businesses to move up the value chain, keeping them tied to a low-cost production model and depressing wages for Taiwan-based employees.
President Lai Ching-te laid out his vision last month for an evolution in Taiwan’s economy, saying that overseas investment should target the Global North rather than mainland China—which was the destination for Taiwanese firms through the 1990s to the 2010s. Taiwan should “seize every moment of geopolitical and economic transformation” to guide national development, he said.
A stronger currency, along with tariffs threatened by President Donald Trump, could provide an opportunity to accelerate much-needed reforms, said an official who asked not to be identified as they’re not authorized to speak publicly on the matter. It could help phase out lo. wer-value manufacturing and redirect capital toward research and development, along with other more competitive sectors, the official said.
It could also help local firms attract foreign talent—especially important as Taiwan’s population ages.
How durable the recent currency’s rise proves remains to be seen, but some market observers see scope for substantial further appreciation. The two-session advance in the local dollar, amounting to a gain of about 6%, caught traders off-guard, and spurred the central bank to call an emergency briefing to warn against speculation.
The volatility emerged after a recent article in the Taipei-based Business Weekly magazine suggested the Taiwan dollar might need to rise to as strong as 13 per US dollar, from about 32 at the end of last month. Coming against the backdrop of trade talks between Taiwanese and US officials, what began as market chatter snowballed into a rush by exporters, retail investors and asset managers to convert their US dollar holdings.
While Taiwanese authorities have underlined that the US didn’t demand currency appreciation in the first round of talks that ended last week, that hasn’t quelled such speculation.
“Taiwan can expect a higher currency will be a quid pro quo for tariff relief,” said Paul Cavey, founder of Taipei-based research firm East Asia Econ. “The current White House has made it clear that currency practices are a trade barrier. Even under the previous administration the Taiwan dollar was considered an issue,” he said.
Trump set a “reciprocal” tariff rate of 32 percent for Taiwan, paused until July while negotiations ensue. A 10 percent universal baseline tariff is in effect in the meantime.
Taiwan’s exports have benefited from a long-stable exchange rate that’s enhanced the competitiveness of its world-leading chipmakers— epitomized by Taiwan Semiconductor Manufacturing Co.
Woods Chen, chief economist at Yuanta Securities Investment Consulting Co., said the shift could prove helpful as more Taiwanese companies look to follow TSMC’s lead and invest in the US. “A stronger Taiwan dollar will come to their aid in this sense,” Chen said.
‘Painful’ shift
But the barriers to a major realignment of the Taiwanese economy may prove too great to overcome. The current system has generated an enormous amount of wealth for the small island with few natural resources. Per-capita gross domestic product leapfrogged Japan’s last year and, according to Taiwan’s Cabinet, is on track to overtake South Korea’s this year.
Also, while big companies like TSMC may be able to weather the impact of a major currency appreciation, smaller, lower-margin exporters, which employ a large proportion of Taiwan’s workers, will feel the squeeze.
“It is painful for exporters, particularly if tariffs on the rest of the world cause a global recession,” Cavey said. “And it could be very painful for Taiwan in general given the years of accumulated USD exposure.”
Sustained Taiwan dollar appreciation could also affect the calculus of the island’s giant life insurance companies—which have long poured cash overseas given limited options for financial investments at home. In its latest annual tally, the US Treasury counted almost $800 billion of Taiwanese holdings—practically the size of the island’s GDP. The recent slide in the greenback means they face potential losses and cash-flow issues.
All things considered, it’s unlikely the central bank will fully loosen its grip on the currency, Cavey said.
“If currency appreciation is a deliberate strategy to get on the right side of the US, then there are many reasons to think Taiwan will want to move gradually,” he said.
