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Last updated: Tuesday, December 11, 2018

 

FOREX: No Volatility toward Year-end

Posted: Saturday, July 28, 2018


Global economic fluctuations, notably the trade war between the United States and China, are forecast to produce significant impacts on Vietnam’s economy. Exchange rate towards the year’s end is predicted to be volatile.

The US Federal Reserve (Fed) raised interest rates and the US dollar has strengthened on global markets for several months and is likely to be firmer as the Fed plans to carry out four more rate hikes from now until the end of 2019.

The rise of the greenback has also resulted from China's slowing economic growth, expected to further decline as the United States continues to escalate the trade row with China. Trade tensions have sunk the Chinese yuan, which has dropped more than five per cent against the dollar since the start of the year.

Impacts from yuan depreciation

The integrated impact of firmer dollar and softer yuan has placed pressures on Vietnamese dong. The USD/VND exchange rate climbed continuously on the free market, hitting a new record high of VND23,300 - 23,330/USD. The quick strengthening of the greenback in the Vietnamese banking system has also caused tensions on both supply and demand sides. The State Bank of Vietnam (SBV) actively stepped up regulatory moves since the beginning of June to indirectly ease pressures on the dollar/dong exchange rate. In mid-July, the market operator sold the foreign currency at a much lower rate than the upper limit, helping the dollar/dong exchange rate to stay stable in the system and cool down the free market. The SBV’s resources and willingness to rein exchange rate fluctuations have increased as foreign exchange reserves amounted to over US$63.5 billion and the trade surplus was higher than recent years.


Trade tensions between the United States and China have heightened, giving rise to steadily weakened yuan since May 2018. On June 7, the United States officially levied duty on imports from China and the Chinese yuan started to drop since then. As of July 13, the central rate quoted by the People's Bank of China (PboC) was fixed at 6.693, down 4.8 per cent lower than the rate on June 6 (6.3888) - the first day the tax was imposed.


Vietnam also witnessed exchange rate volatility during this period. This was referred to the strong yuan devaluation three years ago. On August 11, 12 and 13, 2015, China devalued its currency by 1.9 per cent, 1.6 per cent and 1.1 per cent, respectively. The USD/VND exchange rate fluctuated sharply and the SBV had to intervene.


Year-end gentle waves

Exchange rate fluctuations have been kept in check, according to many experts. The US dollar is likely to gain a slightly higher ground in the second half of 2018 but the US slow economic recovery may prompt the Fed to further normalise interest rates. This means that pressures on the dong are not so heavy. According to specialists, Fed’s continued monetary policy normalisation based on the chosen roadmap will further support the US dollar but it is not a big worry because this prospect has been priced on the market. At commercial banks, a dollar is exchanged into VND23,070.


Another support for the dong is export and import. Vietnam's trade surplus jumped to US$2.57 billion in the first 6 months of 2018, thus generating more room for exchange rate stabilisation in Vietnam.


At the Government’s teleconference with localities, SBV Governor Le Minh Hung said: “The SBV always takes active measures to regulate exchange rates and stands ready to intervene in the foreign exchange market amid supply and demand imbalance to make sure that the foreign exchange market functions smoothly. In the first half of this year, the SBV bought more than US$11 billion to increase the forex reserves to over US$63.5 billion.” Abundant foreign exchange reserves will allow the SBV to aggressively intervene in the market when the US dollar strengthens, and the greenback is hoarded. This builds up confidence - the foundation for the stability of the foreign exchange market.


Bao Chau








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