Though the dong-US dollar exchange rate seems to have temporarily stabilized after forecasts that the Fed will not increase interest rates, it still could change and cause exchange rate strain in the domestic market if the US central bank keeps the rates at the current high level for a longer time.
In the global market, the US dollar is trending up as investors continue to buy the greenback in the expectation that the Fed will not cut interest rates soon. As of Feb 16, the US dollar index (DXY) on the international market reached 104.29 points, up 0.24% over the previous month.
In the domestic market, the State Bank of Vietnam’s central rate of the Vietnamese dong against the US dollar on Feb 16, was 23,971 dong.
However, the average US dollar price on the unofficial market has exceeded 25,000 dong for the first time since October 2022 and although it has decreased slightly, it is currently still at a high level.
Director of HSBC Vietnam’s forex, capital markets and securities services division, Ngo Dang Khoa, forecast that the dong/US dollar exchange rate would be under increasing pressure in the first quarter of 2024. Khoa cited two reasons for the greenback strengthening in January.
Firstly, the recent positive signals from the US labour market and economy, as well as statements from members of the US Federal Open Market Committee (FOMC) about continuing to act based on actual data have caused the market to gradually reduce expectations that the FOMC will soon lower policy interest rates.
The move has pushed US government bond yields to increase slightly again, which has caused the US dollar to regain its strength in the international market.
The DXY is currently holding above 104, which is one of reasons currencies in Asia, including the dong, have become weaker against the US dollar.
In fact, most of the increases in the dong/US dollar exchange rate stemmed from the appreciation of the greenback. In particular, geopolitical instability is always a catalyst for money to find the US dollar as a safe haven.
In 2023, the DXY increased to more than 106 which caused the dong/US dollar exchange rate to sharply surge. The dong at some points lost more than 4% against the dollar last year.
According to experts, the dong/US dollar exchange rates are still likely to increase in the first half of this year as the interest rate gap between the US dollar and dong is still high.
Rising pressure on the exchange rate will drop only when the US dollar reaches its peak and the Fed lowers interest rates.
Another factor that can affect the exchange rate in 2024 is geopolitical instability in the world.
The Red Sea conflict has had a negative effect on the world economy, making economic recovery more difficult due to increases in production costs, prices and inflation.
Economist Pham The Anh, head of the National Economics University’s Department of Economics, said once prices and inflation increase, monetary policy will be slower to return to normal.
According to Anh, Vietnam can still be proactive with the dong/US dollar rate as the country has the advantages of a large trade surplus and relatively positive foreign direct investment disbursement.