The strong increase in US dollar created pressure on exchange rate management. If the exchange rate was kept stable, it would be detrimental to export. If the dong depreciated according to the growth rate of the US dollar, it would cause inflationary pressure.
USD index rebounded strongly to 103 points, surpassing the threshold of 100 points for the first time since the beginning of 2017. Although the FED lowered the interest rate to 0 0.25%, it did not slow the USD’s upward momentum. The US dollar has appreciated by nearly 7.7 percent compared to the bottom set on March 9. From the beginning of the year until now, USD index has increased by 5.8%. Accordingly, US dollar stands at the highest level in three years against euro; while against the pound, the US dollar rose to the highest level since 1985.
According to economic experts, the strong recovery of US dollar is due to several reasons. Firstly, the fact that central banks simultaneously loosened monetary policy has made FED’s interest rate cut not much impact on the US dollar. Even, interest rates in many economies such as Europe and Japan are still negative, so the Fed’s interest rate of 0-0.25 percent still creats more advantages for holding US dollar than euro and Japanese yen.
Secondly, the outbreak of Covid-19 in many European countries and the United States has worried investors, pushing them to buy US dollar to shelter. Meanwhile, the supply of US dollar outside the US is quite scarce, pushing the currency up sharply. In addition, the investors have stepped up selling assets to get additional US dollar margin in the financial market, which also contributed to the increase in US dollar price.
With the goal of cooling the dollar to avoid detrimental to exports and the US economy, last week, the Fed decided to expand US dollar swaps with nine other central banks. However, according to experts, this move is not quite effective when the limit for swapping with these nine banks is only $450 billion. “There are still a lot of investors who need to sell risky assets and they want to keep their money in dollars,” said Yukio Ishizuki, Daiwa Securities foreign exchange strategist in Tokyo.
The strong appreciation of the US dollar has created pressure to increase the domestic exchange rate. Accordingly, the central exchange rate and US dollar trading rates at banks have been continuously adjusted up recently. In the trading session on March 23, the central exchange rate continued to increase by seven dong to 23,259 VND/USD after increasing 30 dong in the previous week. In the last two weeks, the central rate has increased to 69 dong. From the beginning of the year until now, the central rate has increased by 104 dong.
US dollar prices at banks also increased sharply in the last two weeks. On March 23, banks continued to raise both the buying and selling price of the currency to around 23,440 VND/USD (bid price) and 23,610 VND/USD (ask price); an increase of 340 dong per US dollar in the buying direction and an increase of 370 dong per US dollar in the selling direction compared to the previous two weeks, a sharp increase compared to the end of 2019. The gap between the bid and ask prices is widened to 180 200 dong, showing that banks are also concerned about the sharp fluctuation of exchange rates.
However, the increase of the domestic exchange rate has not seeped into the momentum of the US dollar in the global market. generally, the new central exchange rate has increased by 0.45 percent since the beginning of the year; while US dollar prices at banks only increased by about 1.5%. That, in general, has made the dong rise sharply against many other currencies. For example, if on March 12, one euro was exchanged with 26,260 dong, by the end of the weekend, the euro would only be exchanged with 25,509 dong, which means that euro has decreased by 2.86 percent compared to dong. During this period, Chinese yuan also decreased by 0.86 percent against dong.
The appreciation of dong will cause a number of difficulties for export activities, in addition to the negative impact of Covid-19 epidemic. However, if the domestic exchange rate increases with the increase of the US dollar, it means that the dong devalues so sharply, it will put pressure on inflation, thereby causing macroeconomic instability; at the same time create more foreign debt burden for the government and enterprises. In particular, it also undermines confidence in the stability of the dong that the operator has worked hard to build for a long time.
Moreover, according to experts, the rise of US dollar is only short-term due to the impact of the disease on investor sentiment. Therefore, this currency will reverse again when the disease is under control.
“In the short term, exchange rate management needs to be flexible to follow the movements of the US dollar in the global market to avoid detrimental to exports. Besides, there is no cumulative pressure on the exchange rate until it is forced to adjust, the level of adjustment will be large, causing adverse psychological impact in the market”, an expert recommended.
