The Actual Impact of the 2023 US Rate Hike on Taiwan's Investments: Why Is Your Wallet Shrinking?

The Chain Reaction of US Dollar Appreciation—Why Is the TWD Getting “Thinner” Than Ever?

Since March 2022, the Federal Reserve has initiated an unprecedented rate hike cycle. By the end of 2023, the cumulative increase reached 20 basis points (500 basis points), with the benchmark interest rate rising from near zero to the 5.00% to 5.25% range. How intense is this US rate hike? In just 10 Federal Open Market Committee meetings, the Fed raised rates each time, with consecutive 75 basis point hikes in June, July, September, and November 2022, setting a historic record.

All of this stems from runaway inflation—In June 2022, the US Consumer Price Index hit a 40-year high, forcing the Fed to “slam on the brakes.”

So will the Fed continue to raise rates in 2024? According to CME FedWatch predictions, the market still sees a high probability of rate cuts, with rates gradually decreasing from the current 5.25% to around 4%. Here is the estimated schedule for the Fed in 2024:

How Does the US Dollar Appreciation Directly Hit Your Wallet?

Exchange Rate Changes: The Fundamental Reason for TWD Depreciation

Rate hikes cause the US dollar to appreciate. The logic is simple—higher US bank deposit interest rates lead global investors to flock into USD, increasing demand and pushing up its price. In 2022, the US dollar index surged by 8.5%.

What’s the result? The TWD/USD exchange rate declines. Foreign investors who initially exchanged $100,000 for NT$2.7 million to buy Taiwanese stocks, after a year, earned NT$300,000 profit, but due to the 11% TWD depreciation, that NT$3 million can now only buy about $97,000, resulting in a loss. This is why large capital flows are fleeing Taiwan’s stock market.

Import Price Inflation: Your Living Costs Rise

The TWD depreciation directly pushes up import prices. Taiwan imports 22.8% of its agricultural products from the US, and since these goods are priced in USD, a stronger dollar means higher import costs.

Just look at the data: In 2022, Taiwan’s food CPI rose by 6%, with eggs soaring by 26%. The reason is the skyrocketing cost of imported feed (corn, sorghum, etc.). Although Taiwan’s central bank also raised interest rates five times by a total of 75 basis points in an attempt to curb TWD depreciation, compared to the Fed’s massive hikes, this effort is like a drop in the bucket.

How Are the Stock Market and Financial Assets Affected?

Why Is the Taiwan Stock Market Struggling?

The impact of US rate hikes on Taiwan’s stock market comes from two aspects:

First, capital outflows. Due to TWD depreciation and USD appreciation, foreign capital is heavily withdrawing from Taiwan’s stock market to convert into USD for preservation of value. Data from the Taiwan Stock Exchange shows that in 2022, capital outflows reached as high as $41.6 billion, ranking first in Asia. As a result, the Taiwan Weighted Index plunged 21%, ranking sixth from the bottom globally.

Second, rising local interest rates. The Taiwan central bank followed suit with rate hikes, increasing financing costs. Company valuations decline as interest rates rise—higher rates mean lower valuations in financial asset pricing. Additionally, higher corporate financing costs directly erode profits, causing stock prices to fall naturally.

In 2022, Taiwan’s stock market was bleak, with the S&P 500 down 17% and the Nasdaq plunging 30%. It was only in 2023 that the market started to rebound, as investors began to anticipate the Fed halting rate hikes or even cutting rates.

Who Profits from Rate Hikes? The “Counterattack” of Financial Stocks

However, not all stocks decline during rate hikes. Financial stocks (especially banks) actually benefit from rising rates. The reason is straightforward—rate hikes expand banks’ interest margin, significantly increasing profits.

Take Taiwan’s Bank of Taiwan (2834) as an example: in 2022, interest income reached NT$33.3 billion, up 38% year-on-year, and the stock price increased by 20% over the past year. That’s why many investors remain optimistic about financial stocks during rate hike cycles.

The “Pendulum” Effect of Gold and Bonds

The impact of rate hikes on gold and bonds is more complex:

Gold: Gold prices tend to move inversely to interest rate expectations. When the Fed intensifies rate hikes, gold tends to fall, but when expectations shift toward rate cuts, gold rises. In fact, gold kept falling until November 2022, but since late 2022, it has been rising, reflecting market anticipation of Fed rate cuts.

Bonds: Rate hikes push up interest rates, and bond prices move inversely to rates, so rising rates are negative for bonds. The 2023 US banking crisis partly resulted from rate hikes causing bond prices held by banks to plummet, forcing them to sell bonds for cash, creating a vicious cycle.

How Should Ordinary Investors Respond?

In the face of the impact of US rate hikes, investors have three main strategies:

Strategy 1: Invest in USD Trendily

Since USD appreciation is a major trend, why not go with it? There are various ways to invest in USD—bank currency exchange, futures, CFDs, etc. For small investors, CFDs are more cost-effective, with some platforms offering up to 200x leverage, allowing you to buy one lot of USD index with less than $1, fully enjoying USD appreciation gains.

Strategy 2: Adjust Stock Portfolio

Reduce holdings of high-valuation stocks (like Tech Stocks) and increase allocations to high-dividend-yield stocks, especially financial stocks. This approach helps avoid valuation pressure from rate hikes and benefits from rising dividend income. Related ETFs are also good options.

Strategy 3: Use Short Selling to Hedge Risks

Besides reducing stock holdings, investors can also short the Nasdaq 100 index to hedge risks. Since Taiwan’s weighted index is highly positively correlated with the Nasdaq, shorting US stocks can offset some losses when Taiwan stocks decline.

Summary

The Fed’s rate hikes in 2023 have caused multiple impacts on Taiwan: TWD depreciation pushes up import prices, capital outflows hit the stock market, and company valuations decline. But opportunities and risks coexist—investors can profit by investing in USD, buying financial stocks, or shorting indices. The key is timing—the end of a rate hike cycle often signals a reversal. Early positioning can help capture the rebound benefits at the end of the rate hike cycle.