Why is the USD constantly appreciating?

The free market price jumped above 25,000 VND.

Yesterday (January 24), the USD exchange rate at commercial banks continued to fluctuate upwards. For example, in the morning, Eximbank bought cash USD at 24,340 VND and sold it at 24,730 VND, but by early afternoon, the bank had further increased the buying price to 24,380 VND and the selling price to 24,770 VND. Similarly, Vietcombank bought cash USD at 24,365 VND in the morning, but by the afternoon it had increased to 24,400 VND; the selling price increased from 24,735 VND to 24,770 VND… In just one day, the USD exchange rate at commercial banks increased by 40-50 VND. Compared to the beginning of the year, the USD exchange rate at commercial banks has increased by 350 VND, equivalent to an increase of more than 1.4%.

At some foreign exchange bureaus in Ho Chi Minh City, the USD price has also increased rapidly in recent days. On the afternoon of January 24th, the free market USD price continued to be bought at 25,000 VND and sold at 25,100 VND, unchanged from the beginning of the day. However, compared to the beginning of the year, the free market USD price has increased by 400 VND, equivalent to an increase of more than 1.6%.

The US dollar continued to rise in the early days of 2024.

After a long period of cooling down, the domestic USD price has continuously risen in the first two weeks of the new year, mainly due to the appreciation of the currency in the global market. The USD-Index jumped from 101.38 points at the beginning of the year to over 103 points and has remained above this level for several days. Currently, the USD-Index is maintaining around 103.3 points, up nearly 2 points from the beginning of the year and the highest level in the past month. The USD is estimated to have increased by about 1.8% since the beginning of the year. However, the upward trend of the greenback fluctuates as investors continue to speculate on when the US Federal Reserve (Fed) will begin cutting interest rates.

The strong rise of the US dollar means that other currencies are falling. Not only the Vietnamese Dong (VND), but other major currencies have also fallen sharply against the USD, such as the Japanese Yen, which fell by about 2.2% last week; the Euro, which fell by 0.5%; the Thai Baht, which fell by 1.8%; and the South Korean Won (KRW), which fell by 1.9%. Since the beginning of the year, most currencies in the Asian region have recorded a decline of 3-5% compared to the end of 2023.

According to financial and economic expert Associate Professor Dr. Dinh Trong Thinh, the continuous increase in the USD/VND exchange rate in the early days of the new year is both cyclical and influenced by the international market. Domestically, at the end of the year, due to increased import and export activities, the demand for foreign currency from businesses is usually high. Some companies even adopt a defensive mindset, stockpiling extra cash for transactions during the Lunar New Year holiday when banks cease operations.

Besides, although the interest rate differential between VND and USD has narrowed, a significant difference still remains. Furthermore, the global USD price has been continuously rising in recent days as investors no longer have strong expectations that the Fed will cut interest rates soon. A series of data shows that the US economy is still recovering despite interest rates being at their highest level in decades, leading the market to reduce expectations of interest rate cuts starting as early as March. According to Associate Professor Dr. Dinh Trong Thinh, this increase is not too large and is not a cause for concern in the current context for Vietnam.

Exchange rate fluctuations in 2024 will be below 3%.

Although the USD/VND exchange rate has risen faster than expected in recent days, economic and financial experts believe that there will not be much fluctuation. Furthermore, this trend is likely to reverse quickly. In particular, Vietnam's current macroeconomic situation is quite stable, ensuring sufficient foreign currency supply for businesses' import and export needs. At the end of 2023, remittances to Ho Chi Minh City reached over US$9.5 billion, a 43.3% increase compared to 2022. This is the highest growth rate in the last five years and continues to maintain a high proportion.

Ho Chi Minh City typically accounts for over 50% of the country's total remittances. According to some experts, while Vietnam's remittances for the past year haven't yet reached the level of over $19 billion USD seen in 2022, this is still a fairly high figure. Simultaneously, foreign direct investment (FDI) into Vietnam grew positively last year, reaching $36.61 billion USD, a 32.1% increase compared to 2022. Many organizations predict that FDI flows will continue to be positive this year as Vietnam's position has improved; transportation infrastructure has significantly improved due to government investment in public services; and the stock market is likely to be upgraded from frontier to emerging market status.

Associate Professor Dr. Dinh Trong Thinh believes that the current fluctuations in Vietnam's exchange rate are not significant and are unlikely to experience sudden spikes throughout the year. With a trade surplus, remittances, and FDI still increasing, the State Bank of Vietnam has sufficient resources to stabilize the foreign exchange market. However, the increase in the first two weeks of this year is normal and does not yet require intervention from regulatory authorities. After the Lunar New Year holiday in 2024, the exchange rate will soon stabilize again.

According to this expert, the Fed has projected three interest rate cuts throughout 2024. Therefore, although it is not yet possible to determine when the agency will begin implementing interest rate cuts, the trend of the US dollar will continue to decline. This reduces pressure on Vietnam's exchange rate, and the fluctuation of the US dollar domestically remains at a normal level of less than 3% per year.

Sharing the same view, economist Vo Tri Thanh believes that the Fed has recently shown more hesitation in cutting interest rates. This has significantly reduced market expectations that the agency would cut rates from March onwards. This has also pushed the US dollar to appreciate rapidly in the international market, putting pressure on the exchange rate in Vietnam. Furthermore, domestic demand at the end of the year and before the Lunar New Year usually increases more than in normal months, so the slight rise in the USD price is understandable. However, this has not yet impacted exchange rate policy or the economy in general. With increasing remittances to Vietnam and a continued trade surplus, controlling the exchange rate remains within Vietnam's plan. While Vietnam may have to accept stronger fluctuations in the exchange rate range at times, overall volatility throughout 2024 is not expected to be too significant.

A number of securities companies predict that the US dollar will tend to depreciate in 2024. For example, MBS Securities Company forecasts that this year, as global monetary policy begins to ease, the widespread depreciation of the US dollar will reduce pressure on the domestic exchange rate. The exchange rate in 2024 will fluctuate in the range of 23,800 - 24,300 VND/USD and will continue to be supported by factors including trade surplus, recovery in exports and imports, positive FDI disbursement, stable remittances, and strong recovery in international tourism… In a newly published macroeconomic report, regarding the exchange rate, Techcombank's analysis team forecasts that the USD/VND exchange rate will remain stable in the first half of the year and tend to decrease slightly by 2% in the second half as the USD-Index is forecast to decline at the end of 2024. Yuanta Vietnam Securities Company expects exchange rate pressure to decrease significantly in the near future due to a good trade surplus; Foreign direct investment (FDI) into Vietnam continues to increase; the end of the year and the period leading up to Tet (Lunar New Year) will be the peak season for remittances to Vietnam, and the US dollar will weaken in the international market...

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