Reasons for the depreciation of the dong despite the weakening of the USD

(Dan Tri) - The Dong has lost nearly 3% of its value since the beginning of the year, despite a sharp drop in the USD-Index due to Vietnam maintaining low interest rates to support economic growth, according to the State Bank.

At the press conference of the State Bank on July 8, Mr. Pham Chi Quang, Director of the Monetary Policy Department, shared about the developments in the USD/VND exchange rate.

Mr. Quang said that while the USD-Index - a measure of the greenback's strength against other major currencies - has fallen about 10% since the beginning of 2024, the Vietnamese Dong (VND) has still depreciated 2.7-2.8% against the USD. The main reason is that Vietnam maintains a low interest rate level to support economic growth.

“We are implementing the Government ’s policy of reducing lending interest rates. The State Bank has directed credit institutions to cut costs and reduce interest rates to promote production and business. To date, lending interest rates have decreased by about 0.6% per year compared to the end of 2024,” said Mr. Quang.

However, the consequence is that when VND interest rates are low, the domestic currency becomes less attractive in the eyes of investors, especially in the context of the USD offering higher yields. This causes many financial institutions to tend to hold USD. Along with that, the overall balance of payments is still in a good surplus, but foreign capital flows have fluctuated strongly and have been withdrawn from the stock market since 2024.

In the first 6 months of the year alone, foreign investors disbursed about VND267,600 billion into the Vietnamese stock market, but sold up to VND308,300 billion. Thus, the net withdrawal value reached about VND40,700 billion, equivalent to USD1.5 billion.

The Dong has lost nearly 3% of its value since the beginning of the year despite a sharp drop in the USD-Index (Photo: Manh Quan).

Commenting on the second half of the year, Mr. Pham Chi Quang noted a series of external risks.

He emphasized that the Trump administration had just announced the corresponding tax rates for 14 countries on the morning of July 8. According to him, the new tax rate schedule will negatively impact foreign direct investment (FDI) flows, especially in the context of Vietnam being a highly open economy and heavily dependent on exports, of which the US market accounts for a large proportion.

The US Federal Reserve (Fed) policy is also a factor to watch. The Fed has twice delayed its plan to cut interest rates due to the impact of the US government's new tax policy. Mr. Quang commented that the Fed's unpredictable interest rate policy will be a major factor affecting interest rate and exchange rate fluctuations in Vietnam in the coming months.

Although inflation in Europe and Japan is on a downward trend, in the US, the situation remains complicated and uncertain. The Fed's decision on when to adjust interest rates is mainly based on employment data, while current data contains many unknowns and does not show a clear trend.

A representative of the State Bank said that the unit also closely monitors domestic economic indicators. Although the economy has shown certain signs of recovery, the number of businesses withdrawing from the market remains high, according to data from the Ministry of Finance . Therefore, the GDP growth target needs to be assessed carefully and linked to sustainability to avoid putting pressure on monetary policy.

According to Mr. Quang, the implementation of the Government's directive in the effort to achieve economic growth for the whole year is being supported by controlled inflation. He predicted that the consumer price index (CPI) will be kept below 4.5% as set by the National Assembly.

Regarding the upcoming developments in the financial market, Mr. Pham Chi Quang said that it will be affected by many international factors, especially the US tax policy. Due to its large openness, the US tax policy in the coming time will have a great impact not only on investment capital flows and export activities of Vietnam but also on Vietnam's partners.

Regarding gold prices, Deputy Governor Pham Thanh Ha said that in the first months of the year, world gold prices fluctuated continuously and broke records. Domestic gold prices moved in the same direction as the world prices. Thanks to synchronous solutions, the difference between domestic gold prices and world gold prices was basically controlled within a suitable range, about 5 million VND/tael. The State Bank is seeking opinions on amending Decree 24/2012 on gold market management.

Source: https://dantri.com.vn/kinh-doanh/ly-do-tien-dong-mat-gia-du-usd-yeu-di-20250708115547534.htm