A “Mar-a-Lago Accord” for the Taiwan Dollar? The Economic and Geopolitical Consequences

The New Taiwan Dollar (TWD) tends to be a boring currency with limited volatility, but the sudden appreciation – if not revaluation – on 2nd and 5th May has surprised the world. The fact that it happens while Taiwan holds negotiation talks with the Trump administration is telling, although there is no official acknowledgement of the coincidence.Until the recent appreciation, the performance of the TWD was underwhelming versus Asian currencies. Taiwan is between a rock and a hard place economically and geopolitically. Its bilateral trade surplus with the US is among the largest in Asia. Trump expects Taiwan to ramp up military expenditure, but the political deadlock has made it hard to pass the budget.The market has reacted with sharp movement in KRW and JPY, but they are tamed after the initial reaction. It is interesting to note that the three economies are US security allies and are negotiating with the Trump administration. In contrast, the RMB has not followed as much at the time, even if China and the US have reached a deal with 90-day tariff reduction now.For Taiwan, the impact of this sudden TWD appreciation may be more important financially than the real economy. Taiwan’s net international position amounted to USD 1.7 trillion or 229% of GDP in 2023. A sub breakdown of financial holdings firms (large banks plus some lifers) shows large exposure of overseas investment with the share of the US rising to 24% in 2024 from 15% in 2015. It can go up to 57% assuming other overseas investment are also in the USD. In addition, the unhedged portion of foreign investment is substantial, meaning a sudden NTD appreciation will hurt profitability, and potentially solvency. The impact on the real economy might be more limited as Taiwan has a large share of exports in high end semiconductors with a low-price elasticity (nobody else can produce them).The sudden move of the NTD does not seem to be fully market driven even if there is no official acknowledgment of the opposite. One could potentially see a “Mar-a-Lago Accord” for the TWD but with a twist since the negative consequences for Taiwan’s financial system may be larger than expectation.