October 22, 2018 05:00

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The Domestic exchange rate is hard for 'floating'

17:38 | 27/12/2017

VCN - As usually, in the last months of the year, the exchange rate in the country will be waved because of the increased demand for foreign currency and the fluctuation of the international market. However, in Vietnam, the US Federal Reserve (FED) decided to raise interest rates for the third time in the year, the exchange rate remained calm.

the domestic exchange rate is hard for floating
The stable exchange rate will create great peace of mind for domestic and foreign investors. Picture: ST.

Wave hard to float

At the year-end session of December 12-13, 2017, the Fed decided to increase the interest rate by 0.25% to 1.25-1.5%, while keeping the plan of increasing interest rates in 2018-2019 according to US government's bill on tax cuts will only boost US economic growth in the short term, that means the Fed may raise rates three more times in 2018. Therefore, the rate hike at the end of 2017 is the fifth time since the 2008 global financial crisis, and in line with market expectations, the third rate hike this year.

In the world market, after the decision of the Fed, the dollar has fallen sharply, and the USD Index (the measure of the strength of the dollar against a group of six other currencies) fell down 0.7% to 93.44 points. According to experts, this evolution is not only from the FED's prudent point of view on inflation but also from the US and world political situation. However, after several decrease sessions, up to the trading session on December 18, the USD Index rose 0.22% to 93.84 points.

However, in the Vietnam market, the exchange rate has not changed much despite fluctuations, only a few "ripples" after the Fed announced new interest rates. On the morning of 18th December, the central rate was announced by the State Bank of Vietnam (SBV) at 22,439 dong, down 2 dong compared to last week. At commercial banks, the exchange rate fluctuated around 22,670-22,750 VND / USD (buy - sell), almost unchanged in recent months.

In fact, 2017 can be considered as a successful year in the management of exchange rates of the State Bank, because the exchange rate has always maintained stability, even though the central rate increased, but the exchange rate at commercial banks, trade and the free market are stable, even declining. As reported by the National Financial Supervisory Commission, as of November 24, 2017, the central rate was 22,430, up 1.22% compared with the beginning of the year. The commercial bank rate fell by 0.19%, while the free market rate fell by 1.45% over the beginning of the year.

The cause of the above situation due to the Forex market is still supported a lot from these factors: USD index continuously plunged, significantly reducing the pressure on the USD / VND exchange rate. Foreign currency supply was supported significantly when the trade balance surged and foreign investment inflows increased. Generally, in the first 11 months of 2017, export surplus reached USD 2.8 billion. Implemented FDI capital in 11 months was estimated at USD 16 billion, an increase of 11.9% over the same period of 2016. The difference between VND and USD mobilizing rates still tends to hold VND. Foreign exchange reserves rose to a record $ 46 billion, creating a good balance in stabilizing exchange rates.

In addition, according to banking and financial expert - TS. Can Van Luc, the domestic exchange rate is not affected by the Fed due to the increase of interest rates have been reserved into the price in the year by the enterprises, and financial institutions. In addition, the exchange rate was supported by the anti-dollarization target of the SBV, the measures to curb foreign currency borrowing and the stability of the gold price. Therefore, the impact of the Fed on the foreign exchange market is not much.

Impact from new cash flows

In a few days the world will be in 2018 and the market is expected to have some changes, affecting the domestic currency situation. However, according to Mr Nguyen Duc Hung Linh, Director of Analysis and Investment Advisory for individual clients, Saigon Securities Inc. (SSI), the factors supporting the exchange rate are relatively stable thanks to the contribution of the FDI sector and Vietnam's trade surplus, which will create a surplus of overall balance and stabilize the exchange rate.

In addition, economic experts also see the optimistic aspect when cash flow comes from the process of equitization and divestment of state. If the equitization targets of the Government and ministries are successfully implemented, according to the schedule, there will be more money for the economy, especially the foreign currency from foreign investors in the short time, strengthening the foreign exchange market in Vietnam in 2018.

Emphasizing the success of the SBV in managing the exchange rate, the Asian Development Bank (ADB)’s representative in Vietnam said that a record $ 46 billion in foreign exchange reserves would be a safe haven for Vietnam before any changes happen in the future. Therefore, many experts have suggested that the SBV should continue to maintain the USD / VND exchange rate in a narrow band, allowing the central exchange to lose 1.4% in the first 10 to 11 months of 2018. This will help to keep the real exchange rate (REER) high for the domestic currency and to facilitate reserve of further foreign exchange by about $ 5 billion in the first three quarters.

It can be seen that stable exchange rates and the growth of foreign exchange reserves create great peace of mind for domestic and foreign investors. This will contribute to keep the stability of Vietnam's economy in the face of changes in the world economy.

By Huong Diu/ Quynh Lan