As the US Federal Reserve (Fed) stopped raising interest rates, the domestic financial and capital market will not suffer sudden changes in 2019.
During the meeting in March 2019, the Fed decided to limit the increase of US dollar interest rates. This has made the US dollar Index down by 1.5 percent in the recent time and may continue to decline.
In fact, the US dollar/dong exchange rate rise in the past was due to the four increases in basic US dollar interest rates in 2018 (currently being 2.25 2.5 percent per annum) and the depreciation of many major currencies in the basket of currencies for calculating the central reference rate against the US dollar (by three to 10%). This has led to the rise of reference exchange rate and the exchange rate on both interbank market and free market.
The record high remittances of 16 billion US dollars, the record surplus of trade balance of 6.8 billion US dollars, and the disbursement of Foreign Direct Investment (FDI) of up to 19.1 billion US dollars in 2018 have stabilised the US dollar liquidity in the market and curbed the rise of US dollar/dong exchange rate. According to many forecasts, the foreign exchange rate this year will remain stable thanks to the positive support from these factors.
Banking expert Dr Bui Quang Tin said that the 2019 exchange rate will greatly depend on the Fed’s moves and the USChina trade relations. It is possible that after a 90-day tax delay from the end of 2018, the US China trade conflict may increase again. That will negatively affect the US dollar/dong exchange rate, because when the US China tension rises, China may have to use monetary tool against the US.
In the past three months, the Chinese yuan has depreciated by nearly 10%, and many other foreign currencies in the currency basket such as Australian dollar, euro, and Canadian dollar have devaluated by three to seven percent. The US dollar/dong is forecasted to rise by only 1.5 to two percent this year.
Along with controlling the exchange rate, keeping the exchange rate stable and flexible this year, the State Bank of Vietnam (SBV) continues to maintain foreign currency deposit interest rates at zero percent per annum.
According to the SBV’s leader, after applying the policy to cut the US dollar deposit rates to zero percent per annum, the developments of exchange rate and foreign exchange market have been stable with lower psychology of foreign currency hoarding. The system of credit institutions has shifted from net selling to net buying of foreign currency since 2016, facilitating the SBV to acquire a large amount of foreign currency to supplement the national foreign exchange reserves. In the first quarter of 2019, the US dollar/dong exchange rate was kept stable.
Earlier, information from the government showed that before the 2019 Lunar New Year holiday, the monetary policy operator bought about four billion US dollars, raising the national foreign exchange reserves to about 63 billion US dollars. After the Lunar New Year holiday until now, it is estimated that the SBV continued to net purchase by about 2.5 billion US dollars, bringing the national foreign exchange reserves to a new level. It is estimated that the Vietnam’s foreign exchange reserves have doubled in the past three years.
However, according to financial expert Huynh Buu Son, to attract resources into production and business, stabilising macro economy and the dong value plays a key role. When the dong is stable, macro economy is favourable, the demand for reserve of assets in foreign currencies and gold will decline and the need for investment will increase. Therefore, the SBV has been operating an active and flexible monetary policy with the aim of controlling inflation, stabilising macro economy, contributing to raising the position of the dong, and strengthening people’s confidence in dong.
In addition, the SBV has implemented solutions to attract foreign currency into the banking system, seen through the policy of managing foreign currency exchange agents and the policy of buying and selling foreign currency cash to individuals at allowed credit institutions in order to ensure the objective to attract foreign currency into the banking system and ensure consistent management goal. The foreign exchange management policy for foreign exchange activities regulates that economic organisations that are allowed to act as foreign currency exchange agents for credit institutions must meet very strict conditions, in order to ensure that foreign currency exchange activities are carried out effectively and lawfully, creating favourable conditions for individuals who are Vietnamese citizens to buy foreign currencies to serve their overseas spending needs for the purposes of studying, medical treatment, business, travelling and visiting abroad.
