Vietnam dong hovers near historic low as greenback strengthens
[HO CHI MINH CITY] The US dollar hit a peak against the Vietnamese dong on hawkish expectations over the US Federal Reserve’s rate trajectory. While the greenback pulled back a tad on Thursday (Apr 4), analysts expect the pressure to persist for the dong given the wide interest rate differential and recent political developments.
On the other hand, within-target inflation rates in South-east Asia’s fastest growing economy could also see the currency gain some ground, pundits said.
The USD/VND spot rate hit 24,935 on Tuesday, breaking the previous record in November 2022, according to prices from banks compiled by Bloomberg. The pair traded up to a new all-time high of 25,010 on Wednesday, with the Vietnamese currency recording a 3 per cent depreciation since the start of the year.
The country’s central bank, the State Bank of Vietnam (SBV) had weakened the dong’s reference rate to 24,038 on Thursday – lower than this year’s weakest level it had set on Jan 18. The currency is allowed to trade in the country as much as 5 per cent on either side of the regulator’s reference rate.
Maybank Research expects the SBV to hold policy rates in 2024, as the economy recovers and inflation stays within target. The house added however that defending the dong is becoming an increasingly important priority, although the SBV’s actions have so far been primarily been limited to T-bill issuances, in order to withdraw liquidity and shore up the overnight interbank interest rate.
In the so-called black market, the greenback was sold at a record-high rate of 25,700 dong on Mar 11 and has fluctuated above 25,440 since then. Much of the slide was led by a rally in the US dollar as traders doubted the scale of rate cuts by the Fed.
Besides the broad USD strength, Vietnam’s accommodative monetary policy so far, which involved four cuts to key policy rates last year, has widened the disparity between VND and USD interest rates in the interbank market, placing greater strain on the domestic currency. Improved trade prospects have also prompted a higher demand for foreign currencies to finance imports.
Vietnam’s GDP grew 5.66 per cent year on year in the first quarter of 2024, its best Q1 performance since 2020, with export and import growth returning to double-digit rates.
MB Securities analysts expected the current exchange rate pressure to be short-lived as the dong is likely to strengthen due to a favourable trade surplus, increasing disbursement of foreign direct investment capital, steady remittances, and a promising rebound in international tourists.
SBV’s deputy governor Dao Minh Tu said that the central bank would continue to manage the dong exchange rate in a “very flexible” manner and is ready to step in to stabilise the dong if necessary as its foreign reserves have surpassed US$100 billion.
The goal is to guarantee a sufficient supply of dollars to meet the needs of the economy, Tu said.
“A subsequent recovery in the CNY – which the VND tracks – together with renewed USD weakness ahead of the Fed rate cut in June will bring forth a modest VND recovery,” noted Chia Chih Siong Peter, senior FX Strategist at UOB.
He forecasted the currency to gain strength at 24,500 for the second quarter and return to 24,100 – a rate seen last September – by the end of this year.
