The new Taiwan dollar surged by 9.53 points on the 2nd, marking a daily increase of 3.07%, a record rise in nearly 40 years. According to a Financial Times column, the sudden spike in the new Taiwan dollar may be linked to insurance companies urgently hedging against US dollar exposure, putting the central bank in a difficult position.

The report indicates that Taiwanese insurance companies have accumulated approximately $1.7 trillion in overseas assets, mostly invested in US bonds, thus elevating Taiwan's status as a financial powerhouse. However, due to inadequate hedging against rising exchange rate risks, there exists a significant mismatch between liabilities denominated in Taiwan dollars and US dollar assets. In January, Alphaville published an article pointing out that the insurance industry lacks sufficient or timely hedging against foreign exchange risks and that Taiwan's exposure to the US dollar is larger and more unstable than Japan's.

Because of the closure of Taiwan's financial accounts, the insurance industry struggles to effectively hedge against exchange rate risks unless the central bank provides substantial support. Therefore, the actual solvency of Taiwan's insurance industry largely depends on whether the central bank can contain the appreciation of the Taiwan dollar. Alphaville speculates that the sudden surge in the new Taiwan dollar is likely related to insurance companies beginning to urgently hedge their US dollar risks. Due to the high costs of dollar hedging, some insurers may even turn to using the South Korean won or other Asian currencies for indirect hedging, which has also contributed to the appreciation of the won. While countries typically respond calmly to currency appreciations, the Taiwanese central bank finds itself in a predicament. The report analyzes that if Taiwan publicly lowers its exchange rate, it fears being labeled as a 'currency manipulator' by the United States, and due to military reliance, tariff negotiations, and other factors, the government is reluctant to make any moves that could offend the US, leaving the central bank in a difficult position.