If the Fed Hikes Rates in September, Will the U.S.-Japan Joint Yen Intervention Be in Vain? Central Bank Analyzes Key Currency Market Trends

The United States and Japan have recently taken the rare step of jointly intervening in the foreign exchange market to counter the sharp depreciation of the yen, sparking widespread market discussion. Tsai Chiung-min, Director of the Foreign Exchange Bureau at Taiwan's Central Bank, stated that the primary goal of the U.S. and Japanese authorities is not to reverse the yen’s long-term downward trend, but rather to curb excessive market volatility. The sustainability of intervention effects ultimately hinges on the trajectory of the U.S. dollar, which in turn depends on the U.S. economic fundamentals and the Federal Reserve’s (Fed) monetary policy. In particular, the market is closely watching whether the Fed will raise interest rates in September—a key variable that will influence global currency markets.

Today (5th), the Central Bank announced that foreign exchange reserves at the end of July dropped to USD 594.271 billion, a monthly decline of USD 2.881 billion, marking the second consecutive month of decrease. Tsai explained that the change in reserves was mainly driven by three factors: investment returns on foreign exchange assets, revaluation gains from the appreciation of major currencies against the U.S. dollar, and central bank interventions to stabilize market order. In July, the U.S. Dollar Index fell by 1.26%, and major currencies such as the Australian dollar, British pound, Canadian dollar, euro, and yen all appreciated against the dollar—factors that would normally boost the size of foreign exchange reserves. However, these gains were insufficient to offset the reduction caused by the central bank selling dollars to regulate the market.

Tsai noted that market expectations for a Fed rate hike in September have risen, though the outcome still depends on upcoming economic data. If the Fed does raise rates, it would signal that the U.S. economy remains resilient and inflationary pressures have not fully subsided—conditions typically favorable for the dollar. However, markets often price in rate hike expectations in advance; once the policy is announced, if the hike is smaller than expected, the dollar could weaken. Therefore, it cannot be simply assumed that a rate hike will lead to sustained dollar strength.

Tsai emphasized that Japan’s joint intervention with the U.S. was not aimed at targeting a specific exchange rate, but rather to address the yen’s excessively rapid depreciation and reduce market volatility. The yen’s long-term trajectory continues to be influenced by structural factors such as interest rate differentials, carry trades, and Japan’s economic fundamentals. Official intervention alone cannot alter these long-term trends. Going forward, the movement of the U.S. dollar and its spillover effects on other Asian currencies will need to be closely monitored.

Regarding the recent movement of the New Taiwan Dollar (NTD), Tsai analyzed that its exchange rate is primarily influenced by the direction of the U.S. dollar and market supply-demand dynamics. Key factors include foreign capital inflows and outflows, as well as foreign exchange settlements by exporters. When there is a clear one-sided demand in the market, the central bank provides moderate liquidity to prevent excessive exchange rate fluctuations. Once market supply and demand rebalance, prices naturally return to normal mechanisms.

The NTD weakened in July, primarily reflecting a large outflow of foreign capital. According to central bank statistics, including dividend payments and profit repatriation by listed and OTC companies, foreign investors’ net outflows reached approximately USD 28 billion in July. This surge in dollar demand prompted the central bank to intervene in the foreign exchange market.

Tsai stressed that foreign investors do not necessarily repatriate all dividend proceeds immediately; some funds may remain in Taiwan for reinvestment. Recently, foreign selling pressure has gradually eased, and today turned into a net buy of over NT$90 billion, indicating that capital flows are primarily driven by short-term adjustments.

As of the end of July, foreign investors’ holdings of domestic stocks, bonds, and New Taiwan Dollar deposits totaled approximately USD 1.6631 trillion—equivalent to about 280% of foreign exchange reserves. Although reserves declined slightly month-on-month, the USD 594.271 billion level still ranks Taiwan fourth globally in foreign exchange reserves, behind only China, Japan, and Switzerland.