Exchange rate risk remains a major concern in 2025

In a newly released currency market report, MB Securities (MBS) said that the uncertainties related to 'Trump 2.0' could lead to an increase in the value of the USD, thereby creating pressure on domestic exchange rates.

Exchange rate risk remains a major concern in 2025

In a newly released currency market report, MB Securities (MBS) said that the uncertainties related to 'Trump 2.0' could lead to an increase in the value of the USD, thereby creating pressure on domestic exchange rates.

In 2024, the VND/USD exchange rate was under strong pressure, especially in May 2024 when it reached 25,470 VND/USD, down about 4.6% compared to the beginning of the year. This pressure came from the Fed maintaining high interest rates and strong demand for USD to import raw materials and speculate.

The VND then recovered from mid-September thanks to the Fed's interest rate cut, but increased again in Q4/2024 due to strong import demand and USD demand from the State Treasury to pay debt.

By December, the interbank exchange rate reached a record high of VND25,485/USD and the free market exchange rate reached VND25,800/USD. The central exchange rate also reached its highest level since the application of the central exchange rate mechanism.

Analysts believe the exchange rate will fluctuate between 25,500 - 25,800 VND/USD in the first quarter of 2025.

Specifically, macroeconomic factors that will support the exchange rate in 2025 include a stable macroeconomic environment, a positive trade surplus (approximately 24.77 billion USD in 2024), FDI inflows (25.35 billion USD) and a strong recovery in tourism .

DXY index evolution from the beginning of 2024 to January 10, 2025 (Photo: TradingView)

According to MBS, the USD Index (DXY) maintained a steady upward momentum throughout December and reached a two-year high of 108.4 on December 19 after the US Federal Reserve (Fed) decided to cut interest rates by another 0.25%. At the most recent meeting, Fed officials expected only two interest rate cuts in 2025.

The DXY index has been on a steady rise over the past three months, supported by expectations that Donald Trump's policies of fiscal easing, higher tariffs and tighter immigration will boost economic growth but also fuel inflation.

Against this backdrop, the yield on the 10-year US Treasury note rose to its highest level in more than seven months at 4.6% in late December. This also helped support the USD, which rose 2.6% during the month, to 108.5 by late December.

In fact, the exchange rate has been the focus since March 2024. Exchange rate pressure peaked in May when it reached 25,470 VND/USD, marking a depreciation of about 4.6% since the beginning of this year, when facing pressure from the Fed maintaining interest rates at the highest level in 23 years, the demand for USD skyrocketed to serve the import of raw materials and speculative hoarding.

After struggling with devaluation pressure, VND has gradually recovered significantly since mid-September 2024, following a strong interest rate cut of 50 basis points by the Fed - marking the first reduction in 4 years. However, this did not last long as the exchange rate once again heated up in the fourth quarter as businesses boosted imports to increase production for the year-end season. In addition, the State Treasury's demand for USD also increased during this period due to the need to pay debt obligations. Until December, exchange rate pressure remained tense due to the strong recovery of the USD, pushing the interbank exchange rate to a historical high of 25,485 VND/USD at the end of December.

Since the beginning of 2024, the VND has depreciated by more than 4.6% against the USD. The free market exchange rate has also increased to 25,800 VND/USD, while the central rate has reached its highest level since the central rate mechanism was applied in 2016 at 24,335 VND/USD, up 4.3% and 2% respectively compared to the beginning of 2024. In this context, the SBV has had to supply a large amount of foreign currency to the market and flexibly regulate the liquidity of the banking system to reduce pressure on the exchange rate.

"We expect the exchange rate to fluctuate in the range of VND25,500 – 25,800/USD in 1Q25 as the new administration's fiscal easing plans, combined with tighter immigration policies, along with high US interest rates relative to other countries and relatively high US protectionism, are expected to support the increase in the value of the USD in 2025," the report said.

However, there are still positive factors supporting the VND such as: Positive trade surplus (~24.77 billion USD in 2024), FDI inflows (25.35 billion USD, +9.4% YoY) and strong recovery of tourism (+39.5% in 2024). The stability of the macro environment is likely to be maintained and further improvement will be the basis for stabilizing the exchange rate in 2025.

What measures does the operator support?

In 2024, in the context of increasing exchange rate pressure, the State Bank of Vietnam (SBV) flexibly intervened to regulate liquidity, issuing VND 123,700 billion of treasury bills and injecting VND 172,000 billion through the OMO channel. In addition, the SBV reduced the amount of liquidity support in December to maintain the interbank interest rate at a moderately high level.

Interbank interest rates fluctuated during the month, falling to 2.4% on December 19 thanks to liquidity support, but rising back to 4% on December 27 after the SBV sold USD. At the end of December, overnight interest rates were stable at 3.6%, while short-term rates ranged from 4.4% to 4.7%.

Regarding deposit interest rates, after hitting rock bottom in March, deposit interest rates have been on an upward trend since April as the previous low interest rates have caused people to gradually withdraw deposits from the banking system.

The upward trend became more evident from June 2024, when credit growth skyrocketed from 3.4% in May to 6.1% at the end of June. Credit growth 2-3 times faster than the growth rate of capital mobilization has prompted banks to increase deposit interest rates, with some banks even exceeding 6%/year.

(Photo: MBS)

As of the end of December, the 12-month deposit interest rate of commercial banks reached 5.1%, up 0.2% compared to the beginning of the year. The interest rate increased due to high credit demand and credit growth exceeding capital mobilization.

According to data from the MBS report, credit growth by the end of 2024 reached 15.08%, fulfilling the SBV's target. However, bad debt increased by 4.55% compared to the end of 2023, prompting banks to adjust interest rates to attract capital. State-owned commercial banks still maintain interest rates at 4.7%.

Experts say that the room for Vietnam’s monetary policy in 2025 will be limited due to pressure from a strong USD and the risk of the US continuing to investigate currency manipulation. Therefore, the SBV will likely maintain a cautious stance and not expect to cut policy interest rates.

MBS forecasts that the recovery in production and disbursement of public investment are expected to boost credit growth, increasing pressure on deposit interest rates.

"The forecast of 12-month deposit interest rates of major banks will fluctuate between 5% - 5.2% in 2025," the report said.

Source: https://baodaknong.vn/rui-ro-ty-gia-van-la-moi-lo-ngai-lon-trong-nam-2025-240049.html