$Dantri) - VND may face adjustment pressure in the short term, but domestic support factors remain strong enough, while interest rates will not fluctuate too much.
By the end of September 7, the central exchange rate is currently listed by the State Bank of Vietnam at 25,611 VND/USD, rising again by about 6 VND/USD compared to the previous day.
The USD prices at commercial banks such as Vietcombank, BIDV, and Agribank are being traded around 25,830 VND/USD for buying and 26,210 VND/USD for selling, down about 45 VND/USD from the previous day. The USD prices at banks are continuing to trend downward since the beginning of September up to now.
On the international market, later that same evening (Vietnam time), the USD index (DXY Index) was traded around 98.95 points, down 0.22% from the previous session. Even so, fluctuations in the US dollar are expected to be influenced by the actions of the U.S. Federal Reserve (Fed), in the context of the release of a positive August jobs report in the U.S., which has increased expectations for a Fed rate hike as early as September.
Currently, analysts are betting on the likelihood that the Fed will raise rates at about 60%. If the Fed hikes rates, what will happen to the USD/VND exchange rate and to interest rates in Vietnam?
There is an impact on the exchange rate, but not too large
In a discussion with Dân trí reporters, Nguyễn Danh Thái, a macroeconomic analyst at CKG Vietnam Company, said that the USD/VND exchange rate has maintained a narrow fluctuation range in August, recording an increase of about 3.7% since the beginning of the year in the free market and an increase of around 0.6% at commercial banks.
A high interest-rate floor has created a buffer of sufficient interest-rate differential to help keep the VND stable against the region. Therefore, in the scenario where the Fed raises rates by a further 0.25% at its September meeting or later this year, the impact on the exchange rate is present but not much. Additional tailwinds from FDI disbursement inflows and registered capital that are still actively flowing provide a foundation for exchange-rate stability.
If the Fed truly enters a renewed interest rate hike cycle (understood as increasing rates 2–3 times), exchange-rate pressure will be greater. And in order to control the exchange-rate factor, the State Bank of Vietnam may have to keep interest rates at a high level for longer, even raise them further. But this is the most negative scenario that could occur; our base case is that the Fed’s rates will stay unchanged or increase by 0.25%, Thái said.
In the latest information, the Market Research and Global Economics Division of UOB (Singapore) said that the VND strengthened together with other Asian currencies in August, rising 0.8% to 26,073 VND/USD, continuing to show significant resilience to the Fed’s hardline stance since the Federal Open Market Committee (FOMC) meeting in June.
This recovery takes place even when the State Bank sets the central exchange rate at 25,610 VND/USD at the end of August. The difference between the central exchange rate and the spot exchange rate is typically adjusted over time by bringing the spot rate back to a more appropriate level. This indicates that the VND may face mild weakening pressure in the short term when entering Q4.
Another notable development: Vietnam recorded its eighth consecutive month of a trade deficit in July, with a deficit of USD 3.59 billion, as imports rose sharply by 41.4% year-on-year—far exceeding the export growth rate of 25%. According to UOB experts, prolonged trade deficits are becoming an increasingly clear downside factor for the VND, especially if imports continue to remain at high levels while domestic production capacity expands.
However, looking further ahead in the medium and long term, the outlook for the VND to remain relatively stable is still supported by positive underlying factors, including strong economic growth momentum, robust FDI capital inflows, and the State Bank of Vietnam’s proactive exchange-rate management.
The main risks to VND’s outlook include the trade deficit continuing to widen and the market’s reassessment of the Fed’s monetary policy outlook toward tighter conditions, UOB experts said.
How does an increase in interest rates affect consumption and investment?
Regarding interest rates, the Research Department of WiGroup—an Economic & Financial Data and Technology organization—believes that the interest rate hike cycle is real and will almost certainly occur. However, the market has already priced this in, so it is not an unexpected factor. The key question is whether this cycle is strong and lasts long or not.
In the near term, the market newly expects the Fed to raise rates about twice within the next year and then hold them at that level for the long run. Therefore, pressure from the global interest-rate hike cycle is not significant yet, unless there are new developments in the U.S. inflation story.
With an increase of around 0.5%, it is not a major pressure on domestic policy interest rates. The Government still needs to keep the current interest-rate level to support the goal of double-digit economic growth. Not to mention, interest rates in the market are also influenced by many other factors, such as banks’ funding demand, domestic credit demand, and the State Bank of Vietnam’s administrative measures… Therefore, the transmission of pressure from Fed interest rates to domestic market rates, with an expected bandwidth of 0.5%, is almost not high, WiGroup’s expert said.
At the same time, with an increase of about 0.5% already priced in, and in a context where domestic exchange-rate pressure has eased significantly, the interest-rate channel is almost not transmitted into investment and consumption decisions.
For investment, the decision by the private sector to commit capital depends on final consumer demand and confidence in the cycle, not on the spread of half a percentage point in interest rates.
For the export sector, the decisive variables in this period are tariff policy and demand from major markets, rather than necessarily the Fed’s interest rates.
Regarding monetary policy headroom, WiGroup’s Research Department experts believe there is still room, but not in the form of cutting the policy rates further. The current policy interest-rate level is already low; cutting further would have only very small marginal effectiveness, while widening the VND–USD interest-rate spread and re-igniting the exchange-rate pressure itself.
“With an open economy, it is impossible to keep the exchange rate stable at the same time—to allow relatively free capital flows and maintain a fully independent monetary policy. The State Bank of Vietnam’s real room for maneuver right now is to maintain the current level and ensure ample system liquidity, not to loosen further. This is why fiscal policy needs to ‘share the load,’ and this is also where the most room remains, because public debt is still below the ceiling and the Government’s borrowing cost is currently low,” WiGroup’s expert analysis said.