Will the USD/VND rates stabilize?

>> Proactive in dealing with exchange rate pressure

In the long run, several variables continue to sustain USD/VND rates' stability within the authorized range.

A lot of pressure...

The State Bank of Vietnam (SBV) increased the reference exchange rate back to $23,998/USD on the morning of March 27, 2024, after adjusting for a one-session decline. The bid/ask for USD/VND rates at commercial banks was also changed to increase by VND 5–10/USD from the previous day.

In reality, USD/VND rates have been under significant pressure since the end of 2023. The first thing to notice is the contrast in monetary policy between Vietnam and the United States. While the Fed has kept interest rates at their highest level in more than two decades following many prior quick and robust rate hikes, the SBV cut policy rates four times in 2023 and continues to ease policy to support GDP growth.

Furthermore, the liquidity of Vietnam's banking system is very ample due to slow loan growth, which minimizes the interest rate difference between VND and USD, even though the USD's short-term interest rate is higher than the VND's. This also puts significant pressure on the currency rate.

Even the increase in inflation in the first few months of the year has put pressure on the exchange rate. In addition, seasonal factors such as demand for USD to pay for imported commodities pushed USD/VND rates up.

USD/VND rates have climbed since mid-March due to a strong surge in USD in global markets following the Fed's prediction that interest rates would not be reduced as quickly as first projected after US inflation soared up in the early months of this year.

>> Vietnamese economy in 2024: Stable exchange rates, more interest rate cuts needed

Currently, the USD index is hovering at 104.4 points, up 2.1% from the start of the year. As a result, the reference exchange rate has climbed to VND24.015/USD, up 0.6% from the end of 2023.

... but only in the short-term

However, many analysts believe that the causes exerting pressure on USD/VND rates are just temporary, and that in the long run, there are several variables that support the exchange rate.

As a result, the USD's rise is unlikely to persist long, as the Fed is expected to cut interest rates in June 2024. The Fed's March dot plot still suggests that FED officials expect three rate decreases of 25 basis points this year. "The Fed's rate cut will force the USD to decrease, pushing down the USD/VND rates," said Dr. Nguyen Trí Hieu, banking analyst.

The surplus in bank liquidity is only temporary, since loan growth is likely to accelerate during the recovery phase. Many analysts projected that stronger loan growth would result in a comeback in deposit rates in the second half of the year.

The availability of foreign currency in the economy is copious, owing to the trade balance's continued surplus, while FDI disbursement, foreign remittance, and tourism all gaining speed.

Another aspect contributing to experts' lack of worry regarding USD/VND rates is the SBV's extremely flexible and proactive operation. "The SBV's recent increase in issuing T-bills to absorb surplus liquidity will help alleviate exchange-rate pressure," a bank expert emphasizes.

Dr. Can Van Luc, BIDV's Chief Economist, anticipated that VND would drop just 2-2.5 percent this year. While experts at KB Vietnam predicted a 1.5% increase in USD/VND rates to 24.600 VND/USD as a result of Vietnam's improved overall balance sheet.