Exchange rate forecast not to be under high pressure at year-end

The market is banking on the Fed cutting rates by 0.25 basis points at their meeting on December 17-18.

The State Bank of Vietnam (SBV) on December 18 reduced the central exchange rate by VND2 over last week to VND24,253 per dollar. Commercial banks listed the dollar at VND25,135 for buying and VND25,465 for selling, down VND50-60 compared to mid-November 2024. The exchange rate decreased due to the continued decline of the dollar's health in the world recently, with the dollar index (DXY) falling below 106.

According to director of the currency trading division at United Overseas Bank (UOB) Dinh Duc Quang, because Vietnam continues to ensure large balances, have trade surplus and gain positive growth in foreign investment, remittances and tourism, the USD/VND exchange rate will be supported.

As the Vietnamese dong has been tightly managed align with long-term trade and investment activities rather than short-term investment and speculation tools, so the US election result will have little direct impact on dong-denominated interest rates and exchange rates, Quang said.

Analysts of MBS Bank believe that the USD/VND exchange rate pressure will cool down and fluctuate around VND24,700-24,900 per dollar in the fourth quarter of 2024, supported by factors such as loose monetary policies.

In addition, the analysts said, the dollar supply into Vietnam continues to be abundant thanks to trade surplus, foreign investment capital flows and remittances, while the trade deficit in services is increasingly narrowing.

Besides, the analysts believe external factors, including interest rate cut of many central banks in the world, will have a positive impact on the domestic exchange rate at the end of this year. Global interest rates peaked in August 2024 and by November 2024, more than 70% of central banks cut interest rates, such as Canada in June, the UK in August and the Fed twice, in September and November.

Despite expectation of the USD/VND exchange rate not being under high pressure at the end of this year, the SBV has remained cautious about the exchange rate as the Fed's rate-cutting cycle is expected to slow next year.

The market is still predicting that after a rate cut of 0.25 basis point at the meeting on December 17-18, the Fed will make only smaller cuts in 2025, due to the higher inflation risk from US President-elect Donald Trump's policies. Meanwhile, Fed officials, including Chairman Jerome Powell, pointed out that the US central bank is quite cautious in its roadmap for cutting benchmark interest rates.

Financial experts also believe that the dollar demand will increase sharply towards the end of the year to prepare for the new year's production cycle. Currently, there are certain concerns, but the exchange rate is still under control if other factors do not fluctuate too strongly.

SBV Governor Nguyen Thi Hong said the central bank will closely monitor market developments and in case the exchange rate fluctuates too much, it will promptly sell the dollar to intervene.

The SBV will carefully consider interest rate cuts because if interest rates are reduced too much, it will increase the exchange rate and affect foreign investment flows, Hong said.