Economic resilience stronger than AI jitters

WEATHER THE STORM: While the New Taiwan dollar is under substantial pressure, the economy itself is strong, and could push through the shakes by the year’s end

The New Taiwan dollar’s weakness, led by global jitters over artificial intelligence (AI), is masking the nation’s underlying economic resilience that favors the currency’s rally into year-end, analysts say.

While the currency has come under intense pressure, Oversea-Chinese Banking Corp and ING Bank NV see it rebounding to NT$31.60 and NT$31.50 against the US dollar, respectively, implying an appreciation about 3 percent from current levels.

Underscoring those projections is Taiwan’s robust economic growth and current account surplus. Although doubts over lofty AI stock valuations continue to drive outflows and weigh on the NT dollar’s exchange rate in the short term, analysts expect fundamental trade support to prevail over the coming months.

New Taiwan dollar and US dollar banknotes are pictured in Taipei yesterday.

Photo: CNA

“Record trade surpluses and AI-related exports continue to generate underlying Taiwan dollar support,” MUFG Bank Ltd head of global markets research for Asia Lin Li (林莉) said. “But foreign portfolio outflows, outward investment and the large US dollar-Taiwan dollar yield differential is creating offsetting US dollar demand at the moment.”

Lin sees the NT dollar appreciating to NT$31.8 per greenback by the end of the year before gaining to NT$30.9 by the end of June next year.

Taiwan’s current account surplus reached a record high of almost US$70 billion late last year, buoyed by unprecedented global demand for advanced chips, before narrowing moderately in the past few months. At the same time, officials raised the nation’s full-year economic growth forecast to more than 11 percent, putting the technology hub on track for its first double-digit expansion since 2010.

Still, those underlying strengths are running against a wave of foreign capital flight. Foreign investors sold NT$302.6 billion (US$9.33 billion) of Taiwanese equities on Thursday last week, the largest daily outflow on record, pushing the NT dollar to within striking distance of its year-to-date low of about NT$32.50 per US dollar.

While analysts do not view that level as a rigid line in the sand for policymakers, they are watching it closely as a comfortable zone for the monetary authority.

ING Bank NV chief Greater China economist Lynn Song (宋林) said the central bank would attempt to keep the NT dollar relatively rangebound. “I don’t think it is a firm line in the sand to defend, but it does seem that NT$31.5 to NT$32.5 range has been comfortable for them so far this year.”

The central bank is more likely to focus on easing currency volatility than target a certain level, said Jiuk Choi, Asia-Pacific macro strategist at State Street Bank & Trust Co.

“That said, we think the NT$32.4 to NT$32.5 range is an important level for US dollar-Taiwan dollar, as it marks the year-to-date high in 2026,” he added.

Beyond concerns over the tech sector, elevated crude prices are adding pressure on the NT dollar, as the nation is an energy importer. US 10-year Treasury yields sit roughly 300 basis points above similar-tenor Taiwanese sovereign bonds, offering a compelling yield pickup that continues to fuel broad US dollar strength at the expense of regional currencies.

“Near-term headwinds include foreign equity outflows and a strong US dollar amid a hawkish Federal Reserve,” LGT Private Banking foreign exchange and rates specialist Trang Le said.

“Even so, strong export momentum, robust external balances and the AI-driven semiconductor cycle leave the medium-term bias tilted toward Taiwan dollar appreciation. We expect volatility rather than sustained weakness to be the dominant theme,” she said.

Currency traders are watching earnings reports from major semiconductor manufacturers, which strategists view as the next key catalyst for cross-border equity flows and currency volatility. Taiwan Semiconductor Manufacturing Co (台積電) delivered a better-than-expected revenue outlook last week, but it failed to fully calm market worries over the broader AI buildout.

“Upcoming global tech earnings could increase Taiwan dollar volatility, particularly given the market’s heightened sensitivity to AI-related capex, profitability and Chinese competition,” Choi said.

He sees near-term room for NT dollar weakness on AI trade doubts, but expects a recovery to NT$31.80 per US dollar by year-end.

“We see Taiwan dollar one of the best hedge currencies to US dollar strength as capital and current account flows remain strong while it has one of the lowest volatilities across emerging markets,” he said.