Taipei:The central bank of Taiwan is encountering significant challenges in stabilizing the Taiwan dollar due to substantial holdings of Taiwan dollar-denominated assets by foreign institutional investors. These challenges are exacerbated when foreign investors continue to withdraw funds from the country, as noted by market experts.

According to Focus Taiwan, Cathay United Bank Chief Economist Lin Chi-chao highlighted that foreign institutional investors' share in the local market's capitalization has been increasing. This rise has paralleled the expansion of the local stock exchange, with government data showing their share of the market cap grew from 43 percent at the end of 2024 to nearly 50 percent by early October. The Taiex index also saw a significant rise, reaching an all-time high in early October but subsequently fell by over 20 percent amid concerns about potential U.S. restrictions on AI data center development.

Lin pointed out that the volatility in the stock market prompts foreign institutional investors to adjust their portfolios, complicating the central bank's efforts due to the significant funds involved. By the end of October, foreign investors held US$1.743 trillion in Taiwan-listed stocks, bonds, and deposits, equivalent to 292 percent of Taiwan's foreign exchange reserves. The Taiwan dollar's depreciation against the U.S. dollar has persisted into November, despite central bank interventions and Taiwanese exporters converting U.S. dollar earnings into local currency.

The central bank reported a decrease in foreign exchange reserves and significant net capital outflows in October. Lin emphasized the importance of encouraging Taiwanese exporters to convert their U.S. dollar holdings into Taiwan dollars to ease the currency's downward pressure. The Taiwan dollar's performance has lagged behind currencies like the South Korean won, which appreciated significantly due to AI-driven export growth and capital inflows.

Forex analyst Lee Chi-chan noted that despite a recent rebound, there are no clear indicators of a sustained upward trend for the Taiwan dollar, as market volatility continues. Lin added that reversing the current weakness of the Taiwan dollar remains a challenging prospect in the near term.