The US dollar plummets 1.15% against the New Taiwan dollar! The Central Bank reaches a protocol with the US, and The Economist warns of a financial crisis.

The Central Bank of Taiwan announced that it has reached a consensus with the U.S. Treasury on exchange rate policy. The USD/TWD exchange rate plummeted by 1.15% from 31.118 before rebounding, reporting at 31.17 on November 17. The central bank has committed to changing the frequency of foreign exchange intervention information disclosure from semi-annually to quarterly starting at the end of December, in order to enhance policy transparency. The Economist's column warns that Taiwan's long-term large current account surplus and undervalued exchange rate have severely distorted Taiwan's economic structure.

Central Bank and the US Reach Three Major Commitments on Exchange Rate Agreement

The Central Bank of Taiwan has specifically clarified that the U.S. Department of the Treasury “never requested the appreciation of the New Taiwan Dollar” during the consultation process. It also reiterated three core principles: do not manipulate the exchange rate for competitive advantage or distort the balance of payments; interventions should be limited to addressing “excessive volatility” or “disorderly movements” of the exchange rate; forex interventions should be conducted in both directions to avoid unilateral appreciation or depreciation.

The Central Bank emphasized that the contents of this joint statement between Taiwan and the United States were reached after multiple consultations conducted solely by the Central Bank and the U.S. Department of the Treasury, resulting in a consensus. The Central Bank is not a member of the Executive Yuan's Taiwan-U.S. trade working group and did not participate in the negotiations regarding reciprocal tariffs between our administrative team and the U.S. Trade Representative's Office and the U.S. Department of Commerce. This joint statement is unrelated to the reciprocal tariff negotiations between Taiwan and the United States. This clarification attempts to separate the exchange rate issue from trade negotiations, reducing external interpretations of “U.S. pressure for appreciation.”

However, the timing coincidence still triggered market associations. The announcement of the Taiwan-U.S. exchange rate agreement coincided with the day the Economist published a critical article, and the U.S. concern over Taiwan's trade deficit has persisted for years. Although the Central Bank claimed that the U.S. did not request an appreciation, the commitment to increase transparency and take two-way intervention effectively limited the Central Bank's future ability to suppress the New Taiwan Dollar. The market's reaction was also quite direct, with the U.S. dollar depreciating by 1.15% against the New Taiwan Dollar on the day the agreement was announced, marking the largest single-day fluctuation in recent times.

Three Core Contents of the US-Taiwan Exchange Rate Agreement

No Manipulation of Exchange Rate: Commitment not to manipulate the exchange rate for competitive advantage or to distort the balance of payments.

Two-way intervention: Forex intervention should be conducted in both directions to avoid unilateral pressure on the New Taiwan Dollar.

Increase Transparency: Starting from the end of December, the amount of forex intervention will be announced quarterly.

For a long time, before the U.S. Treasury publishes its semi-annual Exchange Rate report, the Central Bank and the department hold 1 to 2 routine meetings to exchange views on topics such as the overall economy and exchange rate policy. This joint statement continues the principle of long-term communication between the two parties and is consistent with the current practical operation of the Central Bank's exchange rate policy. This statement attempts to downplay the importance of the agreement, framing it as a result of routine communication.

The Economist Reveals Three Major Consequences of the Undervalued New Taiwan Dollar

The Economist article points out that Taiwan's Central Bank has maintained a low New Taiwan Dollar for many years to strengthen export competitiveness. According to The Economist's GDP-adjusted Big Mac Index, the New Taiwan Dollar is undervalued against the US Dollar by as much as 55%, the highest in the world. Following the surge in AI demand, these economic imbalances have expanded even more rapidly. In October 2025, Taiwan's goods trade surplus reached 31% of GDP on an annualized basis, setting a historical high, four times that of pre-pandemic levels.

The Economist points out three major consequences. First is the decline in consumer purchasing power, which benefits the export industry as low purchasing power is transferred to consumers. Taiwanese people save too much and consume too little. Since 1998, private consumption has drastically decreased its share of GDP by 20 percentage points. The Economist believes that the original intention of this policy was to make Taiwan wealthy, but it has instead deprived ordinary people of their achievements.

Secondly, the skyrocketing housing prices are due to the Central Bank's years of printing New Taiwan Dollars to purchase forex, leading to excess liquidity in the financial system and low interest rates, which further accelerates the rise in housing prices. Since 1998, housing prices in Taiwan have surged fourfold. Thirdly, the financial system is forced to bet on US dollar assets in order to digest the recurring trade surplus, and the government tacitly allows Taiwan's life insurance industry to invest heavily overseas: the scale of life insurance funds invested abroad is nearly 1 trillion US dollars, the vast majority of which are US government bonds. However, this has caused serious currency mismatches, as the liabilities of insurance companies are denominated in New Taiwan Dollars, while their assets are mostly denominated in US dollars. If the New Taiwan Dollar appreciates rapidly or the US dollar depreciates sharply, the asset-liability balance may be instantly disrupted, potentially triggering a crisis in the life insurance industry.

The Economist warns that two major risks are approaching: if the US dollar continues to depreciate, Taiwan's life insurance could become a systemic risk; and US trade pressures may force Taiwan to appreciate. The Economist further points out that unlike Japan and South Korea, which have already signed trade agreements with the Trump administration, Taiwan faces greater risks. In May of this year, amid market concerns over US-Taiwan tensions, the New Taiwan Dollar briefly appreciated by 9%.

Political and Economic Factors Hindering Central Bank Reform

The Economist points out two major factors that lead the Central Bank to be unwilling to reform monetary policy. First, the political pressure from the export manufacturing sector; while top technology companies can withstand appreciation, small manufacturing businesses that rely heavily on thin profit margins from exports will be severely impacted. These companies employ about 70% of the manufacturing workforce, making the government hesitant to easily implement reforms. The report estimates that a 20% appreciation of the New Taiwan Dollar would result in a decline of about 8 percentage points in TSMC's operating profit margin, but it would still be higher than that of Alphabet or Apple.

Secondly, the power of the Central Bank is extraordinarily large, and the huge foreign exchange earnings brought by monetary policy make the Central Bank an important source of government revenue. The surplus of the Central Bank accounts for 6% of government revenue, far higher than the average of 0.4% in advanced countries. This also gives the Central Bank a high level of political influence. This observation reveals the political economy behind Taiwan's monetary policy: the Central Bank is not only a technical monetary management institution but also an important source of fiscal revenue and the center of political power.

However, Chenglap's article notes that The Economist is essentially advocating for the appreciation of the New Taiwan Dollar, but the discourse is deliberately one-sided. He points out that the article describes “a low exchange rate equals taxing consumers” as a major issue, yet ignores that currency appreciation will also tax producers, only emphasizing that Taiwan is an import-dependent economy while avoiding the fact that Taiwan is also highly reliant on exports. He also refutes The Economist's attribution of rising housing prices to exchange rate undervaluation by citing the global surge in housing prices from 2020 to 2025, pointing out that Taiwan's housing price increase is similar to the world average, and even lower than in some countries.

Chenglap also believes that The Economist acknowledges that 70% of Taiwan's manufacturing employment relies on low-margin traditional industries, yet still advocates for appreciation, which means sacrificing traditional industries. If supporters of appreciation simultaneously criticize that only the technology industry in Taiwan makes money while traditional industries are struggling, it is a self-contradiction. He further questions the article's mention of “insurance industry risks” and “avoiding Trump tariffs” as reasons for appreciation, criticizing that the argument resembles emotional mobilization rather than rigorous analysis.