The exchange rate posted a strong increase in the first sessions of the first week of October but registered a decline in the last days of the week. The State Bank of Vietnam (SBV) did not change the central exchange rate, which remained unchanged at VND23,417 per dollar on October 7.

The USD could soon return to its early 2022 high, Photo: Dung Minh

The US Federal Reserve is set to hike its key interest rate to above 4 per cent and hold it there beyond 2023 in its bid to stamp out high inflation. As a result, investor sentiment is under pressure from both global inflation and the Fed’s policy. Capital outflows indicate mounting pressure on the devaluation of currencies from emerging countries, including Vietnam. Global currencies have depreciated significantly against the US dollar since the end of 2021.

According to a new report by ACBS, BV Bank has sold about $21 billion of foreign currencies since the beginning of 2022, equivalent to 19 per cent of total foreign exchange reserves. The move puts current reserves at around $89 billion, which has reduced the import coverage ratio to about 12 weeks. In August alone, ACBS estimated that the SBV sold more than $3 billion in nominal terms.

Economist Le Xuan Nghia said, “The SBV has made a decision to increase the selling price of the US dollar to support the market and find a new equilibrium. This is partly due to a large demand for foreign currencies in Vietnam. Meanwhile, prior to this, a number of foreign currencies have been accumulated.”

Le Quang Trung, head of Treasury at VIB, stressed that the VND is one of the least-adjusted currencies in comparison to those of other nations in the region and the rest of the world, at roughly 5 per cent. However, Vietnam’s foreign exchange market has been affected by fluctuations in the financial market.

Thus, the adjustment of the VND is simply the rebalancing of the exchange rate rather than a devaluation or sign of volatility.

“When evaluating the liquidity of foreign currency, it is important to take account of demand in the market and society. People have a great need to purchase foreign currency for payment. Meanwhile, given the low interest rates in the domestic market, companies with excess capital should transfer foreign currency abroad,” he added.

Trung added that the SBV also hiked interest rates to improve sentiment for the VND. This also helps maintain the value of the VND given that the difference between VND and US dollar interest rates is always positive.

Regarding the issue of selling foreign currencies in nominal terms, Trung noted that SBV’s intervention by selling FX forward will help ease the demand for foreign currencies. This is one way to cool the forex market as well as avoid fluctuations due to psychological factors.

VNDirect experts believed that the exchange rate will remain under pressure in the last months of 2022 due to the high US dollar when the Fed continues to lift interest rates. However, they also predict that the VND may only adjust about 3.5-4.0 per cent against the US dollar in 2022.

Meanwhile, Rong Viet Securities Corporation (VDSC) is concerned about a worse scenario for the devaluation of VND given that the US dollar continues to rise. The US dollar index is currently trading 2.02 per cent higher than it was at the end of August.

“In the context of other central banks not being as determined to deal with high inflation as the Fed, we believe the US dollar will be able to return to its early 2022 peak. This means that pressure on the domestic exchange rate is inevitable as buffers to help stabilise the exchange rate have weakened,” wrote one VDSC expert.

VDSC anticipates an increase of 4-5 per cent in the pricing adjustment of the VND this year when the US dollar climbs significantly. Despite the fact that the VND/USD interest rate disparity in the interbank market is still significantly favourable, the demand for the US dollar in the banking system has not yet subsided.

In a more upbeat statement, Petroleum Securities Company reported that the pressure on exchange rates has been steadily rising as a result of the SBV interest rate policy being different from that of other major central banks.

Dinh Duc Quang, managing director of the Currency Trading Division at UOB Vietnam, said that VND was not immune to the downward trend of currencies across Asia against the strong appreciation of the US dollar following the Fed rate hikes and growing concerns about China’s slowdown. “Therefore, the VND is likely to depreciate further in the coming quarters, although the slippage could be minimised by the prospect of strong economic growth in Vietnam,” Quang said.