DBS upgrades Vietnamese dong forecast after currency truce with United States

DBS has upgraded its full-year forecast for the dong, after the latest agreement between Vietnam and the United States on foreign exchange (FX) policy.

Despite a previous US stance that labelled Vietnam a currency manipulator, the two countries released a joint statement last month stating that the State Bank of Vietnam will refrain from dong devaluation that gives the currency an unfair competitive advantage. The US also agreed to withdraw the cudgel of potential trade tariff penalties against Vietnam.

Increased FX flexibility should give Vietnam's central bank freer rein to adjust to economic shocks and manage domestic liquidity conditions, DBS economist Chua Han Teng wrote in a report published on Wednesday.

With the Vietnamese currency recently trading on the stronger side, DBS now expects it to make gains to 22,870 dong (S$1.36) against the US dollar as at end-2021, up from the house forecast of 23,070 dong previously.

Mr Chua said in his report that the US' retreat on tariffs "augurs well for foreign investment and exports to the US" and reduces business uncertainty.

"Vietnam has so far benefited from US-China trade friction and remains in a favourable position," he said, noting that the US is Vietnam's largest export partner. "The removal of the tariff threat by the US, coupled with Vietnam's manufacturing capability built up over the years, should also support the Asian nation's export-led model over the medium term."

Maybank Kim Eng economists Linda Liu and Chua Hak Bin previously said of the US decision: "We see this as largely positive and removes some of the near-term risks that the US may impose punitive, broad-sweeping tariffs on Vietnamese goods."