The Future Is Uncertain, Exchange Rates Might Experience Some 'Bumps'

Although the central exchange rate increased by less than 1.7% in the first seven months of this year, and the Vietnamese dong is still among the most stable currencies in the region and the world, the developments in both the domestic and global foreign exchange markets since early August have made the USD’s signals difficult to predict in the remaining months of the year.

The foreign exchange market in the first months of this year saw more increases than decreases. The foreign exchange “waves” exceeded the expectations of financial experts, and at one point, the exchange rate on the free market approached 26,000 VND/USD, anchoring at 25,950 VND/USD on June 24. Earlier, many optimistic economists predicted that the exchange rate wouldn’t exceed 25,000 VND. Faced with these unexpected fluctuations in exchange rates in the early months of the year, the State Bank of Vietnam has consistently acted to stabilize the market, such as increasing the supply of USD in the market since late April and adjusting the central exchange rate. Sources familiar with the interbank market estimate that the State Bank has sold about 6.4 billion USD to commercial banks so far.

According to the Governor of the State Bank of Vietnam, Nguyễn Thị Hồng, as of July 31, 2024, the central exchange rate stood at 24,255 VND/USD, an increase of 1.63% compared to the end of 2023, which is relatively low and stable compared to other currencies in the region and the world.

As of July 31, 2024, the central exchange rate stood at 24,255 VND/USD, an increase of 1.63% compared to the end of 2023.

From a macroeconomic perspective of both the global and domestic economies, many analysts predict that the path ahead for exchange rates will experience some 'bumps.' This is reflected not only in the increasingly volatile USD/VND exchange rate as per the DXY index (US dollar index), especially from the beginning of 2024 until now, but also in other objective factors.

Specifically, on the global market, the outlook for the USD is tied to central bank monetary policies, interest rate differentials, and the US elections. Currently, futures contracts are priced in a gradual reduction in policy interest rates by major central banks. The recent slowdown in both US economic activity and inflation data suggests that the timing of the Fed’s interest rate cuts is approaching. Since early July, the market has quickly priced in a weaker USD as signs indicate that the US Federal Reserve (Fed) will soon ease its policies.

However, an analyst from Rồng Việt Securities (VDSC) believes that even though the interest rate direction of the Fed and other central banks might be out of sync, the Fed’s policy rate will still be higher than that of other central banks for the next 6 months to a year. This difference in policy rates may continue to drive interest rate arbitrage activities, thereby keeping the USD, with its relatively high yield, in a stronger position compared to other currencies.

In the coming months, the USD’s movements might be influenced by the developments in US politics as the presidential election approaches, and other major drivers for the currency include the growth outlook of the US economy, the interest rate differential between the US and other economies, and the USD’s safe-haven role in the face of geopolitical risks.

In the domestic market, the exchange rate is not only influenced by global market factors but also depends on domestic demand. In reality, USD demand usually increases towards the end of the third quarter and the beginning of the fourth quarter each year due to the need to import machinery and materials for year-end export orders. Therefore, the scenario where the USD’s strength is maintained will be a challenge for the State Bank’s exchange rate management in the final months of 2024.

VDSC believes that based on the outlook for the USD to maintain its relative strength and the return of foreign currency demand pressure, the path to exchange rate stability may still have some bumps ahead. The base scenario for the USD/VND exchange rate in the interbank market could rise to 25,500 VND/USD and then fall back to 25,300 VND/USD by year-end. A more optimistic scenario would occur if both pressures are controlled, in which case the exchange rate could decrease to 25,000 VND/USD by year-end.

According to economic experts, solving the exchange rate problem is not just about ensuring supply to cool the market during fluctuations but also about maintaining management policies so that people “care less” about the USD, limiting the dollarization of the economy.

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Resource: congthuong.vn