Higher Fed interest rate could weaken Vietnamese currency

By Dat Nguyen   December 22, 2018 | 04:58 pm PT
Higher Fed interest rate could weaken Vietnamese currency
The dong has fallen by some 1.57 percent, against the greenback since the beginning of the year. Photo by Reuters/Kham
The U.S. recent interest hike might result in a high demand for U.S. dollars in Vietnam, weakening the local currency further, experts say.

The U.S. Federal Reserve Wednesday raised its interest rates for the fourth time this year to 2.25-2.5 percent. The Fed has projected two more hikes next year.

Every time the Fed raises its interest rate, the interest rate for the greenback will increase at international banks, economist Nguyen Tri Hieu told VnExpress International.

He said that with the interest rate on dollar accounts at Vietnamese banks at zero percent currently, investors might look to deposit their money in international banks for at least 2 percent.

"This could result in a bleeding of dollars which could lead to a lower supply of the greenback in Vietnam."

Hieu added that the smaller supply of dollars will increase its exchange rate against the dong.

The Fed interest rate increase will pressure the USD-VND exchange rate, as the dollar strengthens further over the dong.

Local banks will push their interest rates up to prevent their customers from exchanging local currency to the U.S. dollar, he said.

According to Ngo Dang Khoa, HSBC country head of global markets, another risk is that the U.S. dollar is forecast to be stronger next year, making a weaker dong a high possibility.

Economist Hieu said that a strong dollar will also increase its exchange rate against the Chinese yuan, which will create even greater pressure on the dong.

If the dong value remains unchanged, it will become stronger against the yuan, and Chinese exports to Vietnam could increase, resulting in a higher trade deficit than Vietnam has already has with the country, he said.

However, other observers have said that as the fourth hike has been predicted, the Vietnamese market has prepared itself for the new interest rate and short-term impacts could be mitigated.

Khoa with HSBC also said that there won’t be major responses from the Vietnam market following this hike, especially the forex market, as investors have already expected the interest rate to be raised.

The local finance market won’t have to bear major impacts because of the raise, as the State Bank of Vietnam has recently taken measures to control the exchange rate and interest rate to stabilize the market, he said.

The dong has fallen by some 1.57 percent, against the greenback since the beginning of the year. The dong hit 23,419 to the dollar on Friday.

Prime Minister Nguyen Xuan Phuc had said in August that the devaluation of the dong needs to be kept within a 2-percent band this year compared with the end of last year.

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