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Vietnam’s interest rates lower, forex rate under pressure

Ongoing interest rate cuts are thought to put a hard pressure on the dong/US dollar exchange rate. However, economists do not think that the dong would depreciate sharply this year.

Exchange rate under pressure

According to Pham Hong Hai, Deputy General Director of HSBC Vietnam, when the interest rates go down significantly, this would generate influences on the dong/dollar exchange rate.

If the inflation rate decreases sharply as expected by the government after a series of measures is applied to curb inflation, and if government implements its plan to slash bank loan interest rates to help businesses resume production, the total demand of the national economy would increase. If so, the demand for importing goods would also increase.

When the dong interest rates go down rapidly, the enterprises, which previously borrowed dollars, may shift to borrow dong which would be used to buy foreign currencies to terminate the foreign currency loans. Meanwhile, people would withdraw Vietnam dong to buy gold. In this case, the demand for gold would increase sharply.

Besides, as analysts have pointed out, the demand for dollar would increase towards the end of the year, when businesses need dollars to import goods for the year-end sale season.

Banking experts have said that the dong/dollar exchange rate performance would depend on the government’s capability of harmonizing the implementation of macroeconomic tasks, and on the relations among the inflation, bank loan interest rates and the exchange rate.

Once the interest rates go down in accordance with the inflation rate performance and fit the general economic conditions, the pressure on the exchange rate would not be big.

SBV’s commitment would not be broken

Economists all believe that the task of curbing the dong depreciation at less than three percent this year would be within reach.

HSBC thinks that the dong/dollar exchange rate would continue stabilizing, while the dong may slightly depreciate, reaching the 21,500 dong per dollar threshold by the end of the year, which means the 2.4 percent depreciation in comparison with the beginning of the year.

Meanwhile, Standard Chartered Vietnam has predicted that the exchange rate would be somewhere at 21,700 dong per dollar.

As such, the reports by international institutions all show that the exchange rate fluctuations would be very minor, acceptable to the national economy.

Dr Can Van Luc, a banking expert, also said that less-than-3-percent exchange rate fluctuation proves to be attainable.

According to Luc, the watchdog agency needs to focus on three issues. First, the central bank needs to control the foreign currency lending in order to drive the foreign currency credit flow on the right track. Second, Vietnam needs to be preserving to follow the fight against the dollarization. Third, it needs to better control the gold market by narrowing the domestic and international gold prices.

Hai from HSBC said that if there are signs of the dollar supply shortage which may trigger heavy price fluctuations, the State Bank would put foreign currencies into circulation. With the more profuse foreign currency reserves, the State Bank’s intervention would be absolutely able to control the market prices.

Hai also said that the Vietnam dong interest rates should be kept at reasonable rates which allow both fostering the economic growth and making the dong more attractive, thus helping ease the pressure on the exchange rate.

Analysts have agreed that the dollar black market, which has been put under strict control, can no more influence the official markets.-- VietNamNet


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