Taipei:Net fund outflows by foreign institutional investors have significantly contributed to the Taiwan dollar's sharp depreciation against the U.S. dollar in recent months, as reported by Taiwan's central bank.
According to Focus Taiwan, the central bank submitted a written report to the Legislative Yuan, revealing that foreign institutional investors recorded net fund outflows of US$54.3 billion since July. During this period, the Taiwan dollar depreciated by approximately 2 percent against the U.S. dollar.
In the first half of the year, these investors had already registered net fund outflows of US$23.3 billion, adding pressure to the Taiwan dollar amidst rising military tensions in the Middle East and apprehensions regarding a hawkish U.S. Federal Reserve. In response to the volatility in the foreign exchange market, the central bank intervened by selling US$17.04 billion more than it purchased over the six-month timeframe.
From July to October 21, renewed fears of military conflict between the United States and Iran, as well as a global sell-off in technology stocks due to concerns over AI spending, adversely affected the Taiex, Taiwan Stock Exchange's benchmark index. This situation prompted further withdrawals of funds by foreign institutional investors, who recorded net stock sales of NT$1.25 trillion, or approximately US$38.7 billion, during this period. The total net fund outflows, including capital gains and cash dividends, amounted to about US$54.3 billion.
Despite the considerable outflows, the Taiwan dollar has remained relatively stable compared to several other non-U.S. dollar currencies. From January 1 to October 21, the Taiwan dollar depreciated by 3.23 percent against the U.S. dollar, while the U.S. dollar index, which gauges the greenback against a basket of major trading partners' currencies, rose 3.49 percent. The Taiwan dollar's decline was less severe than that of the Swiss franc, euro, and Thai baht, which fell 3.89 percent, 4.35 percent, and 6.29 percent respectively.
Taiwan's small, open economy relies heavily on trade, and its foreign exchange market is relatively shallow. As such, central bank intervention is seen as necessary to stabilize the currency. The central bank aims to maintain Taiwan dollar fluctuations within a narrow range in comparison to the euro, South Korean won, and Japanese yen. This strategy is designed to help Taiwanese exporters stabilize prices, secure orders, and support the broader economy.
