Taipei: The central bank on Friday rejected an allegation by The Economist that it has kept the Taiwan dollar undervalued to bolster exports and created “hidden risks” for the economy, saying the currency’s value is determined by market supply and demand.
According to Focus Taiwan, the central bank issued a statement countering an article in The Economist titled “The hidden risks in Taiwan’s boom.” The bank argued that the article’s use of the Big Mac Index to assess the Taiwan dollar was mistaken and led to a distorted conclusion.
The Economist claimed that the Taiwan dollar is undervalued by 55 percent against the U.S. dollar based on the Big Mac Index, which serves as a measure to illustrate how far a currency has diverged from its intrinsic value. The magazine suggested that while the undervaluation enhances Taiwanese exporters’ global competitiveness, it deprives ordinary Taiwanese consumers of economic growth benefits and contributes to financial risks.
The central bank criticized the Big Mac Index as a flawed metric, noting that even The Economist recognized its limitations as early as 2003. Additionally, The Economist acknowledged in 2006 that the index had been misused in currency valuation assessments.
To counter the claims, the central bank cited the iPhone Index, developed by Nomura Securities in 2016. This index assesses a currency’s value based on iPhone prices in the respective market and indicated that the Taiwan dollar was 17.1 percent overvalued against the U.S. dollar, contrasting sharply with the Big Mac Index’s conclusion.
The central bank emphasized that a currency’s value is influenced by multiple factors, with the Taiwan dollar being determined by a market mechanism driven by supply and demand. It pointed out that cross-border capital flows have become one of the most significant determinants of currency value in a free financial market.
Furthermore, the central bank highlighted that supply and demand in the currency market are linked to financial product transactions. In 2024, the combined fund flows of foreign and local capital were 19.3 times greater than commodity transaction values, rendering the Purchasing Power Parity an inappropriate tool for evaluating consumer spending power and currency valuation.
Despite experiencing a widening trade surplus with the United States this year, the central bank stated that it has engaged in consultations with the U.S. Treasury on foreign exchange rate and macroeconomic matters. The U.S. Treasury has not requested any action to strengthen the Taiwan dollar against the U.S. dollar.
The central bank has occasionally intervened in the market to mitigate volatility and assured that it will maintain transparent communication with the U.S. Treasury regarding its market interventions.