Lesson 2: Flexibly respond to exchange rate fluctuations
Before the tightening monetary policies of countries to deal with escalating inflation, the market witnessed the rapid increase in the USD value, to the highest level in 20 years. In contrast, the euro and other foreign currencies were pushed to the bottom, the lowest in the past 20-37 years.
In the country, there was a time when the dong fell by nearly 9% once morest the USD. This figure shows that exchange rate pressure is huge and it is forecasted that there will be more fluctuations in the context that the global financial picture is still unpredictable in 2023.
Unprecedented pressure
Since September 2022, the domestic foreign exchange market has been under great pressure following global inflation continuously increased, the US Federal Reserve (Fed) continuously adjusted quickly and strongly operating interest rates, causing the greenback to appreciate to the highest level within 20 years. The psychology of holding the exchange rate increased once more.
In this context, the State Bank has 6 times increase selling price in USD in just 2 months (from September to November 2022), with a total increase of 1,720 VND, equivalent to 7.4% increase.
Along with the decision to increase the USD selling price, on October 17, the State Bank of Vietnam announced the decision to adjust the USD/VND spot exchange rate band from ±3% to ±5%, effective immediately. The selling price of USD immediately increased sharply from 23,925 dong to 24,380 dong, equivalent to an increase of 455 dong. This is a sharp increase that has not been seen by the operator in many years.
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At that time, Dr. Vo Tri Thanh assessed that the pressure on the exchange rate and inflation was huge, and it was necessary for the State Bank to widen the exchange rate band. This is also a way to partially relieve pressure on the exchange rate, find a new equilibrium more suitable for the exchange rate and also create room for more flexible and proactive monetary policy management. Loosening the exchange rate adjustment band is just one of many solutions and tools that the State Bank has implemented to help stabilize the exchange rate relatively in comparison with exchange rate fluctuations of many other countries as well as in other countries. the context that the Fed and many countries continue to tighten their currencies and raise interest rates.
Also during this period, the State Bank increased the sale of foreign currency from the national foreign exchange reserve fund to intervene in the market (estimated to sell regarding 25 billion USD) and restarted the issuance of T-bills on the open market following this period. more than two years of this shutdown to support liquidity.
Especially in the past year, the State Bank has had 2 strong increases in operating interest rates, one of the goals is to balance the fluctuations in the USD/VND exchange rate.
The central rate has continuously gone down in recent sessions. Single vj: DongGovernor of the State Bank Nguyen Thi Hong also shared that the exchange rate management in 2022 is subject to enhanced supervision by the US side, under the pressure of the rising dollar, if it follows its commitments, the State Bank will difficult to stabilize the market. Therefore, the State Bank has actively negotiated with the US side and reported to the Prime Minister to manage the exchange rate more flexibly.
“Calm down” the fever
Thanks to the timely interventions of the State Bank, along with new changes in the world market, by the beginning of November 2022, the domestic exchange rate began to tend to “soften”, by the end of the year. In 2022, the USD/VND exchange rate is only regarding 3.5% higher than the beginning of the year, lower than other currencies in the world (such as RMB down 9.86%, Korean Won down 8.64%, The Japanese yen fell 14.97 percent.
Operations in the foreign currency market have basically gone smoothly, legal foreign currency needs have been met by credit institutions, including demand for foreign currency to import petrol and oil, thereby contributing to stabilizing the economy. macroeconomic stability and inflation control.
To get this result, on the morning of 11/11/2022, the State Bank adjusted the reference exchange rate at the State Bank’s Transaction Office down to 10 dong, to 24,860 dong/USD. This is the first time the State Bank rate reduction transactions in 2022, following having increased 6 times since the beginning of the year.
Following that, on November 18, November 25 and December 9, 2022, the State Bank continued to decrease. Each time, the spot selling USD rate has the same reduction of 10 dong. Thus, the spot USD exchange rate from 24,860 VND/USD on 11/11 has been adjusted to 24,830 VND/USD on December 9, 2022.
Therefore, the central exchange rate has also been continuously adjusted downward: From the peak of 23,700 VND/USD on October 24, it was lowered to 23,612 VND/USD on December 30, 2022, or 88 VND.
Along with that, the USD price at commercial banks was also adjusted down. At Vietcombank, the selling price of USD on December 30, 2022 at VND 23,760/USD, decreased by VND 1,126 compared to October 24 (VND 24,885). Other commercial banks also experienced similar reductions.
Exchange rate at Vietcombank from October 24 to December 31, 2022. Unit: DongBy the end of the year, the central exchange rate increased by nearly 2.4% compared to the beginning of the year, while the listed rate at Vietcombank increased by 3.5%.
SSI experts assessed that the rapid increase of the dollar’s strength caused many currencies in the world to depreciate sharply, Vietnam is no exception, although the dong devaluation is among the lowest in the world.
“In general, the psychology of hoarding USD may have been relieved thanks to the widening gap between VND and USD mobilizing interest rates,” said SSI Securities Company’s analysis unit.
Besides, according to SSI, the decrease in the exchange rate at the end of the year was also due to the basic factors related to foreign currency supply, which also had many positive points, such as disbursed FDI, indirect investment, balance. trade surplus or cash flow from new foreign currency loans disbursed at the end of the year.
However, experts also believe that the pressure on the exchange rate may return, but it is unlikely to be as negative as in 2022 because the pressure has also gradually decreased. According to the plan, the Fed will still raise interest rates in 2023, but the pressure will be lighter because the USD has slowed down compared to most other currencies, including the dong.
Leaders of the State Bank also said that it is very difficult for Vietnam to go once morest the general flow of the world, when the Fed will continue to raise interest rates.
“Although the pressure has been reduced, but it cannot be subjective, the USD will still be volatile if the US economic inflation is not controlled. The State Bank of Vietnam continues to be steadfast in its goal of maintaining stability in the foreign currency market, and may return to buy foreign exchange when market conditions are favorable,” emphasized Mr. Pham Chi Quang, Director of the Monetary Policy Department. ./.
Thuy Ha (Vietnam+)
