Fed raising interest rate to have negligible effect on USD/VND exchange rate: experts

The reason is that the new foreign exchange rate management mechanism put in place by the State Bank of Vietnam (SBV) has effectively prevented speculation on the US dollar.

According to the Fed’s most recent bulletin, most officials thought “it likely would be appropriate” to raise rates in June.

In Vietnam, experts are of the opinion that, given the Fed’s cautiousness, it would only raise the rate by 0.25 per cent in June, if at all. This raise, according to Can Van Luc, director of BIDV Training School, is surely going to affect Vietnam, but not too greatly.

Nguyen Van Dung, chairman of Tan Viet Securities, said the 0.25 per cent rate is not too big. “Besides, the new exchange rate control mechanism, namely the central exchange rate, makes speculation harder so it is not likely that there is going to be big fluctuations in the foreign exchange market,” Dung said.

Other experts also said that if the Fed increases the interest rate, the USD/VND exchange rate is going to change, but only gradually: no steep rise is on the horizon like it was the case at previous raises.

“In the previous times when the exchange rate rose sharply and the market showed signs of a shortage of the USD, it was all because of big commercial banks holding vast volumes of USD for speculation. However, with the current control mechanism that the SBV put in place, the exchange rate changes by the day and is difficult to guess, so speculation becomes harder. Moreover, the SBV can see how much USD commercial banks have and know what they are doing, which will likely discourage them from speculation,” another expert said.

The biggest worry is China letting the Yuan fall. According to economist Vo Tri Thanh, if the Fed raises the interest rate even by 0.25 per cent, the USD is going to be stronger. Meanwhile, the Yuan is continuously getting weaker. “If China lets the Yuan fall, the Vietnamese economy is going to suffer,” he said.

“Recently the Fed has been hesitant to raise interest rates and the Yuan has not been falling as much as expected, so the foreign exchange market in Vietnam has been quite stable. However, with the Fed possibly raising the interest rate once more and with the very likely possibility of China letting the Yuan fall, as well as other currencies’ possible devaluation, the market is under a lot of pressure,” Thanh said.

Though the exchange rate has not seen big increases since the beginning of the year, the pressure still exists. Remittances and foreign direct investment are both increasing, but Nguyen Duc Thanh, director of Vietnam Institute for Economic and Policy Research, said that the country’s foreign reserves are decreasing, all the while Vietnam still maintains a trade deficit.

Though the SBV has recently managed to stabilise the exchange rate, experts said that by the end of this year it will have to raise the USD/VND exchange rate by about 2-3 per cent, compared to the end of last year. When the exchange rate rises, the biggest difficulty for the government and the SBV will be to cut or at least keep down interest rates. The government and the SBV hoped to decrease the annual lending interest rate by between 0.5 and 1 percentage point, but an exchange rate rise might put that goal out of reach.