The US FED’s ‘less hawkish policy’ on raising interest rate has affected the exchange rate for the Vietnamese dong this year.
The probability of the US FED maintaining the Fed Fund Rate at 2.25-2.5 percent is 70 percent, according to foreign institutions. The US dollar Index dropped from 97.5 points in the second half of December 2018 to 95.5 points.
Analysts once showed concern about the sharp depreciation of the dong in the past when the yuan of China, which amounted to a large proportion in global trade and GDP, was devalued sharply.
At that time, The Financial Times quoted James Kwok from Amundi Asset Management as saying that the renminbi weakness represented a new risk for Asian currencies.
Meanwhile, Bloomberg commented that it would be better for Vietnam to hope that PBOC (People’s Bank of China) would fulfill its promise and stabilize the yuan.
The Vietnam dong has been depreciating since late November. On the first trading day of 2019, SBV made a noteworthy move of raising the dollar purchase price to VND23,200 per dollar, an increase of VND500, and maintaining the selling price at VND23,460, thus narrowing the gap between the sell/buy prices from VND760 per dollar to VND260.
About the move, SSI Retail said that the 2.2 percent depreciation showed the central bank wants to generate a new base price for the dollar. This will help increase the forex reserves in the kieu hoi (overseas remittance) season.
Meanwhile, a forex trader commented that SBV ‘doesn’t want to see the dong depreciate too much”, because in case of negative events which could lead to the dollar supply reverse, this may lead to exchange rate fluctuations.
In Vietnam, the dollar supply in the first months of the year is always high, which appreciates the dong. In general, the first months of year are the time for Vietnam to hoard more dollars.
One of the factors that support the exchange rate stabilization is the surplus in Vietnam’s total payment balance since 2016. The current situation is different from 2015 and 2007-2011, when the Vietnam dong depreciated sharply.
The surplus comes from both current account and capital balance. It is expected that the general payment balance will continue seeing a surplus in 2019 thanks to steady exports. Vietnam still attracts FDI and the overseas remittance has been stable.
Citing these factors, Bao Viet Securities (BVSC) believes that the dong depreciation of 5 percent will not occur in 2019, while a depreciation of less than 3 percent is more likely to happen.